• Riding the Hardware Wave, Lemnos Labs Raises $20 Million Fund

    Lemnos teamLemnos Labs, a hardware accelerator in San Francisco, is taking the wraps off a new, $20 million fund this morning. It’s quite an accomplishment. Three years ago, when founders Jeremy Conrad and Helen Zelman pitched investors on the idea of a hardware incubator, they were brushed off time and again.

    Then the pair, both M.I.T.-trained mechanical engineers, sat down with AngelList’s Naval Ravikant. “We got in front of him, and he said, ‘I love this, and I’m going to introduce you to other people,’” recalls Conrad. “And of course, because it’s Naval, it was like a 15-minute long discussion so he could get to another meeting.”

    It was long enough. After raising $1.85 million from investors to launch Lemnos Labs, Conrad and Zelman have spent the last two years investing $50,000 to $100,000 in promising teams, the first 10 of which have gone on to raise over $35 million in funding. One is Airware, which makes logic boards, sensors and actuators for drones; another is Local Motion, a company whose device helps enterprises manage their fleet of vehicles. Andreessen Horowitz led the funding of both.

    I recently stopped by Lemnos’ new 8,000-square warehouse — a former fish factory — to learn from Conrad what’s next.

    You have a new fund, and a new partner, Eric Klein, a former entrepreneur-in-residence who you promoted in February. Have the three of you begun investing the new fund?

    We started investing a few months ago, and we’ve made three investments, one of which is still stealth. The first, Ceres, is a drone company that monitors crops. The other is 6Sensor, which is building a handheld device that you can use to test food for gluten and that will eventually test dairy, shellfish, and peanuts.

    You’ll be writing bigger checks, in the range of $100,000 to $250,000. What kinds of companies will you back?

    We focus on five areas. About 20 percent is in aerospace: we’ve already [backed] three drone-related companies and a satellite company. Watching the growth in those areas over the last two years has been phenomenal. Robotics is also a big focus area for us, as is the “Internet of things,” transportation, and general consumer electronics.

    Is there any hardware sector you’d actively avoid investing in because it’s overdone?

    One area that’s pretty overheated right now is wearables, and wearables that are narrowly focused. Also, fashion tech. There’s some stuff that’s interesting, but we’ve seen a bunch of applications for things like clothes that light up.

    A couple of years into this, what patterns are you starting to see? What’s a common mistake young hardware startups make?

    One mistake centers on brand, interestingly. This is [advice dating back to] Proctor & Gamble, but brand is everything, and if you pick the wrong brand, and it’s too small of a target market, you can’t get the traction you need to get further funding.

    Take Jawbone, which is almost a meaningless brand but [has come to represent] quality. It has this huge market because basically everybody can buy from it. But startups often make branding choices early on that limit their market size. If you go to a venture capitalist and say, “Every skater in the world want this,” the investor’s question is going to be: “Okay, but are there enough skaters in the world to [rationalize this investment]?

    Also, there’s almost this mythology that you do this prototype, and it goes to China and gets manufactured. People always undervalue how much on-the-ground work you need to do in China to ensure your product meets your quality standards and that you’ve done the right testing.

    How are you helping them solve those issues?

    We have a set of contract manufacturers who we feel work well with startups. We also make [our startups] do a product requirements document, which gets really into the details of not just design for manufacturability but also design for usability. We have a company, Bia, that does a sports watch for female triathletes, and at the end of the day, it has to go into salt water and to survive cold and heat. It’s very different than 6Sensors, which will go in a pocket or purse. There’s no expectation that I can dunk [its product] in salt water for 45 minutes and that it will still work.

    How have you gone about forming the kinds of relationships with investors that help ensure your companies get seen?

    It’s just good old-fashioned hustle. I spent a year going to every event I could possibly attend and hustling everyone and convincing them that we’re interesting enough to visit. After you get traction, you get more introductions. And after Airware’s funding happened, a couple of VCs who hadn’t responded to emails were definitely like, “I don’t know how I missed [your note], I’d love to come by.” [Laughs.]

    (Image of Helen Zelman, Eric Klein, and Jeremy Conrad, pictured left to right, courtesy of Lemnos Labs.)

    Connie

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  • An Early Bet on Box Looks to Pay Huge Dividends

    Aaron Levie and Dylan SmithA few weeks ago, I talked shop with DFJ managing director Josh Stein about everything from Bitcoin (he’s bearish on the digital currency) to which firms are doing the most “fringe” investing (Khosla Ventures, Founders Fund, Google).

    Naturally, one of the topics we covered was Stein’s very early investment in the online storage company Box. It was a “very risky bet,” as he said at the time.  Lucky for DFJ, as it turns out.

    When earlier today Box publicly revealed its plans to raise up to $250 million in an IPO, many were surprised by the size of DFJ’s stake. Its 25.5 percent of the company is nearly twice the size stake of Box’s next-biggest shareholder, U.S. Venture Partners, which owns 13 percent. It also dwarfs the ownership positions of  Box cofounders Aaron Levie and Dylan Smith, who respectively own 4.1 percent and 1.8 percent.

    Altogether, Box has raised $414 million, including its most recent, $100 million, round, which closed in December at what Levie told reporters was a $2 billion valuation. Almost none of the firms that led Box’s later rounds are listed on its S-1; meanwhile, DFJ, which invested a total of $30 million in the company, could clear roughly $500 million if Box maintains its current valuation holds up.

    When I’d asked Stein what he saw in Levie and Smith seven-plus years ago, he told me that DFJ always looks for two things: “Markets that have the potential to be big, and entrepreneurs who are passionate and driven and kind of unreasonable. They aren’t willing to accept the conventional wisdom. They’re doing things that by their nature are very hard, and most people will tell them they’re wrong, and they’re so committed in their vision that they bull through that.”

    Even though Box  had just thousands of users at the time, Stein saw a big market opportunity.  It “struck us as a product that could be very horizontal – not just for salespeople or doctors but for everybody,” he said.

    Also, Levie and Smith were appropriately unreasonable. They were “obviously sharp, bright, and hard-working,” Stein observed, noting that when presented with questions they couldn’t immediately answer, they’d often provide long, thoughtful responses within a few hours.

    But Stein also based his investment thesis on something that firm cofounder Tim Draper told him when he first joined the firm. Draper had told Stein to “think why something could work, rather than why it couldn’t.”

    Why not, indeed.

    Connie

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  • Bubba Murarka: DFJ’s Newest Whiz

    bubba_headSteve Jurvetson has always been DFJ’s boy wonder, a polymath whose interests range from nanoscience to space travel and who received his electrical engineering degree from Stanford in two-and-a-half years (then he nabbed his master’s, then an MBA).

    Now, the Sand Hill Road venture firm appears to have found a new whiz in Bubba Murarka, who was brought on as a managing director last May and has some pretty impressive credentials of his own.

    The son of a scientist and an engineer, Murarka grew up in San Jose and Cupertino before heading off to Cal Poly in San Luis Obispo, Ca., “mostly because I wanted to go somewhere my parents couldn’t drive to see me by surprise,” he tells me over coffee at San Francisco’s Epicenter Café.

    As he was graduating, Microsoft recruited him to Seattle, where in 2001, Murarka was among a group of graduates to invent one of the earliest versions of social networking, an online application called Three Degrees. Eighteen months after Murarka arrived at Microsoft, however, his group was reorganized, its resources cut, and Murarka headed back to Cal Poly and earned his master’s degree.

    Again, Microsoft came knocking, this time offering Murarka the chance to run all product for Bing in the Bay Area. He happily stayed another three years. But by 2008, like a lot of top talent, Murarka — who speaks fast and smiles often — found himself at Facebook, where he talked his way into a business development role. He says he wanted to learn something new. What he discovered was how to handily outmaneuver traditional biz dev people. “I’d built Web software and desktop software and I understood the product and the engineering side of things,” he says. “The business person would have to bring in the engineer or product manager and I’d just start negotiating directly with that person and all of a sudden, we’d have an awesome deal for Facebook. It was sort of like a superpower.”

    It became too rote, in fact, so in early 2011, Murarka asked to switch to product management. With the move, he became the third product manager at Facebook to focus on mobile, and the first to zero in on Android specifically, eventually leading more than 50 people in the creation of Facebook’s Android app. (Given Android’s adoption, it’s probably the most-used interface for Facebook at this point.)

    Whether all of that experience will translate into success at DFJ is an open question, though it’s easy to see how it might.

    Murarka, for example, recently led the Series A round of CircleCI, a “continuous integration platform” that basically takes code sitting on a developer’s GitHub repository and quickly runs tests on it on Amazon’s Web services, pushing out what’s working to end users. The company has plenty of competitors, including CloudBees and Semaphore. But CircleCI has “built the best product out there,” says Murarka, “and as one of the few VCs who has written and shipped desktop, Web, and mobile software, I think I uniquely get it. I really see the power of the future they’ve created.”

    In the meantime, Murarka, a nut for all things mobile, can’t resist developing a still-stealth mobile company in parallel. “The agreement I had with DFJ was that I’d finish the company building, so I’m chairman but I got out of an operational role at the end of 2013.”

    Murarka replaced himself as CEO with a former COO of Virgin Mobile. “So, it’s like, going to be a thing,” he says excitedly.

    I ask the newly minted VC if his startup has raised any capital. “None so far,” he says with a slight smirk. “We’re still debating.”

    Connie

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  • The Analyst: Talking with Azure Capital’s Mike Kwatinetz

    Mike KwatinetzMike Kwatinetz is old school. The cofounder of Azure Capital in San Francisco isn’t likely to call himself a “an artisan” or “venture assistant.” He’s no great fan of networking. And Kwatinetz co-manages the firm with three people he has worked alongside for 20 years, a rarity in the venture world. (The firm’s GPs all spun out together from Credit Suisse First Boston.)

    Azure emerged on the scene in 2000, just as the market was going into Internet Bubble free fall. Bolstered by early wins like VMWare, which EMC acquired for $675 million in 2003; and BillMeLater, which eBay purchased in 2008 for $945 million, Azure survived, but it had to significantly reconstitute itself in the process. Although Azure raised $540 million in its 2000 debut fund, its second fund (vintage year 2006) was only $127 million, and Kwatinetz says the firm’s third fund, closed in 2011 is “smaller,” on the scale of its immediate predecessor.

    Today Azure focuses on post-seed-stage investments. The other day, StrictlyVC caught up with Kwatinetz, an amiable straight-talker with a PhD in mathematical modeling, to talk about that shift — and what’s next. Our chat has been shortened for length.

    Azure’s team is like a band. How would its four GPs characterize one other? Who plays drums?

    Hah. I’m probably the most analytic, though Paul Weinstein is pretty similar. Cameron [Lester] is probably the best one at networking. And Paul Ferris has some very deep relationships with real superstars in his area. He’s also probably the nicest of the four of us.

    Azure had some big exits in the aughts. What are some of your most recent exits?

    Cyan, [a computer network gear company] went public last year. We also had a relatively fast exit with [travel app] TripIt [acquired by the expense and travel management company Concur for $120 million in 2011].

    We completed our distribution of stock last year of Concur, which was an unusual deal but worked out well. When Concur came to the table, it was offering much less. We said no, so Concur wound up guaranteeing us its stock would be worth a certain amount two-and-a-half years later. We had to hold on to the stock [for the duration] but it made it possible for them to give us a lot less stock, while we locked in the price we wanted.

    I’ve read about these ratchet provisions, which sound incredibly risky. Are you seeing more of them?

    Not first-hand, though I’ve heard other instances of them. This was a pretty big payday for key members of the TripIt team, though, and taking cash right away [versus agreeing to this stock deal] would have significantly reduced their payday.

    Where’s your investment sweet spot right now?

    We tend to come in at around a $10 million [pre-money valuation], so we call ourselves post-seed — that’s how we think of ourselves. We’re aiming to have three-quarters of our startups in that category and one or two earlier and one or two later.

    It seems like that stage is getting crowded all of a sudden.

    Post seed is still the least crowded. About 40 percent of seed-funded companies can’t get to their next round, so we have a tremendous volume of opportunity, though, again, we’ll make exceptions and go even earlier. We’ve already invested in the new company of TripIt’s founders,Chairish, an online consignment marketplace for furniture. It’s now reaching that post-seed stage and they’ll have to decide if they raise another round; from our view, I’d be happy if we could lead it.

    Having experienced the late ’90s dot com bubble, how are you feeling about the market right now?

    It’s wide open but the requirements are much higher than they were in the mid ‘90s, even pre-bubble. What’s interesting to us: the Toronto Stock Exchange and the London Stock Exchange are trying to fill the gap that Nasdaq has created by moving up market, so we’re looking at them. We want as many options as possible for our companies.

    What are the advantages and disadvantages of going abroad?

    There are lots of pros and cons to Toronto. The pros: you need a minimum of $10 million in [annual] revenue, not $100 million. Of course, you don’t want the to be orphaned afterward, where there’s no constituency of buyers and your company becomes a penny stock. So we’re trying to understand all of that better before we do anything in that arena.

    We’ve been studying London longer. The [revenue] threshold is higher, but there are restrictions about how you can exit that make it trickier.

    Do you think the U.S. is anti- small companies?

    I think startups that get acquired before going public cut off job creation and that the government should pay attention to that.

    Connie

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  • Foreign Firms Rule the Roost in Israel, Says Local VC

    Adam FisherIsrael’s startup scene has probably never looked quite so promising to investors. In 2013, five venture-backed companies headquartered in the country netted $2.7 billion at the time of their respective exits, says CB Insights. Within that group: Google acquired the social mapping service Waze for $1.1 billion; the Web development platform company Wix went public (its market cap is currently $670 million); and Cisco acquired the mobile networking firm Intucell for $475 million.

    The country’s prospects this year look just as bright. Last month, for example, Israeli-run Viber, a voice and messaging service with a development center in the country, was sold to Rakuten of Japan for about $900 million. Around the same time, Covidien, the health care company, completed its acquisition of Given Imaging for $860 million. (Given makes a capsule with a camera that is swallowed, allowing doctors to see patients’ intestinal tracts.)

    “Three years ago, the [Israeli] press was complaining about a lack of big, $500 million exits,” recalls Adam Fisher, who co-manages the Herzliya, Israel office of Bessemer Venture Partners. “Now billion-dollar exits are growing boring to [reporters]. That’s good news.”

    It’s good news for global firms like Bessemer, at least, which set up an office in 1992 and in 2007 plucked Fisher out of Jerusalem Venture Partners, which he joined straight out of Georgetown Unversity. Fisher says he has led “15 or so” investments for Bessemer and that roughly half have produced stellar returns, including Intucell and Wix.

    From where he’s sitting, both Israeli venture firms and U.S. firms without a local presence could miss out on Israel’s maturation into a mainstream tech market – which, by the way, is just fine with him.

    “Israeli funds had proprietary deal flow” during the last bubble, but “I don’t think any Israeli fund ever created a strong brand,” he says. “Why work with a small, no-name fund when you can work with Bessemer?”

    I ask Fisher if things might change. For example, the country’s former Finance Ministry Director General Haim Shani and the former head of Microsoft’s R&D operations in Israel, Moshe Lichtman, are reportedly close to raising $250 million for a new venture fund. Another Israeli venture firm called Stage One is raising $100 million for a second fund that has reportedly already closed on roughly $75 million. Isn’t it likely that competition will increase?

    Fisher notes that activity is picking up but says that in many cases, Israeli VCs are “going for the scraps.” Bessemer, he says, has “50 odd professionals across the U.S. working at deals – networking. We have a huge trove of competitive industry information that no local fund can compete with.”

    As for U.S. investors who might be tempted to spend more time in the region right now, Fisher says the venture community is “welcoming,” but “It’s a tight network … I’ve been here 15, 16 years, and those of us who are active literally know everybody, along with who they’ve worked with, and who was in the army with them.”

    Language is an issue, too. “Everyone speaks in English, but if you don’t speak Hebrew, you’ll be a few steps behind, no question about it.”

    To be a successful investor in Israel also “takes a certain culture,” he adds.

    “I fit here in Israel. I fit there [in the U.S],” says Fisher, who has twice lived in the U.S. “There aren’t many people who fit that profile.”

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

    Connie

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  • Metamorphic Ventures Closes on $70 Million to Back Post-Seed Deals

    David HirschNew York’s Metamorphic Ventures isn’t one of best-known brands outside the city. That’s by design, says cofounder David Hirsch, who was Google’s second employee in New York and stayed eight years before diving into venture capital in 2009. After raising $20 million from well-connected individual investors to get started, Metamorphic needed time to start proving itself, he suggests.

    Fast forward to today, and things appear to be clicking along. The firm, which invests in digital media, commerce, payments, ad tech, software infrastructure and other Internet-enabled startups, has already enjoyed seven minor exits, and its portfolio includes promising companies like the popular crowd-funding platform Indiegogo and the retail analytics company RetailNext. More, Metamorphic has cultivated what Hirsch calls a “distributed human engine” made up of both powerful advisors (including Square’s head of product and engineering, Gokul Rajaram), individual investors (HSN Chairman and CEO Mindy Grossman), and deep-pocketed strategic investors (Advance Publications) that have collectively given Metamorphic another $50 million to “add to the cover” of that earlier, $20 million fund, says Hirsch.

    The capital will be used to invest in many more startups, but Metamorphic also raised the funds to maintain more ownership of its breakout portfolio companies, which the firm hasn’t been able to do to date. Hirsch talked with StrictlyVC about it yesterday.

    You’re looking to fund startups that have raised some money but not Series A money. Is that still an underserved segment in New York?

    We think so. The market has really shifted to where the large private equity firms like Coatue Management and Tiger Global are [making big bets on later-stage companies] and big VCs like Kleiner Perkins are moving downstream to do more A and B. But there’s still a hole in the market right now in seed. It’s the opposite of the Series A crunch; we’re seeing amazing, angel-funded companies that are hitting their growth stages that don’t want to raise these mega A rounds just yet.

    You say you made some mistakes early on. What was the biggest?

    A lot of the companies grew bigger more quickly than we anticipated, so we ended up farming out our winners to Silicon Valley. We built a great portfolio, but [our fund] was too small to have meaningful ownership. So right now, the goal is 10 percent ownership – that’s what we strive for. We raised the money in order to have that optionality that we’ve been losing.

    What size checks will you be writing now that you have more to invest?

    They’ll be anywhere from $500,000 to $1 million for that first bite.

    You have investments on both coasts. How would you characterize valuations in New York right now, compared with Silicon Valley?

    It seems more specific to the team than [rooted in geography], though it sometimes feels like the capital on the West Coast is less price sensitive than in New York. That could be a function of a lot of things. I think New York is more monetization and revenue focused. [Investors here] like more data to back into a [high] price.

    Is Metamorphic a typical New York firm in that sense?

    We’re not value investors, but we’re disciplined as far as price is concerned, and we want to make sure we’re careful. We’ll pay up for the right teams. And we do believe we’re at the next generation of Internet businesses where maybe the price increase is justified. But sometimes it’s not. Sometimes you’re dealing with bigger investors who are [offering term sheets] as a call option, and that can price up opportunities for the wrong reasons.

    Anything else you can share that you’ve learned thus far as a VC?

    Google always had this [hiring] thing called the “airport test.” Someone could be an all star, super smart, capable of helping you solve pain points. But if you missed your flight and were trapped at the airport [together], would you be excited to hang out with this person?

    Working relationships are long-term relationships; that’s true of [colleagues] as well as with investors and founders. There are always reasons to say no to deals. A lot of the business is just trusting your gut.

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

    Connie

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  • Josh Stein on the New DFJ

    JoshSteinDFJ as done what a lot of firms struggle to pull off; it has undergone a management shift without completely spooking LPs, who recently committed to give the firm $325 million for its newest fund. The transition was 18 months in the making, says Josh Stein, who joined DFJ a decade ago and who now, along with longtime partners Andreas Stavropoulos and Steve Jurvetson, runs DFJ without firm cofounders Tim Draper and John Fisher. (Draper and Fisher remain on the management committee.)

    Late last week, I talked with Stein — who has led investments for DFJ inYammer, Redfin, and Box, among other companies – to learn about the new vision for the firm. Our conversation has been edited lightly for length.

    Along with transition at the top of Draper, the firm has decided to return its focus to mostly U.S. companies, cut out clean tech as a sector of interest, and scale back on the size of its partnership. What drove the latter decision?

    DFJ had broadened pretty significantly [in numerous ways] and we thought we made better decisions when we had five or six people around the table rather than 10 or 12. We just think venture is very idiosyncratic in that it doesn’t scale very well. One person making all the decisions himself doesn’t have that cognitive diversity. But 10 or 15 [people around the table] is like a corporate meeting.

    We’re also focused on developing the next generation team, so bringing in people like Bubba [Muraka, a former product manager at both Facebook and Microsoft who joined the firm last May]. I’m 40, and [during this last fundraise], I got questions about LPs about my own succession plan. I said, “Really? I just got here.”

    You’re focusing on consumer tech, mobile, business and enterprise technology. What else should we expect to see from DFJ going forward?

    We also focus on disruptive technology, things that aren’t about building an app or putting together a Web site. Something like Uber is an incredible service with powerful network effects, but there’s no real technical innovation there. Contrast that to [DFJ-backed] Tesla or SpaceX or [biofuels startup] Synthetic Genomics or [D-Wave Systems], our quantum computing company. Just [Wednesday], we announced that we’re backing [human genome pioneer] Craig Venter in his newest endeavor, Human Longevity. [Editor’s note: Venter’s new company, which just closed a $70 million Series A round, plans to scan the DNA of as many as 100,000 people a year with the hope that the information will lead to new, life-extending therapies. Venter is also the cofounder of Synthetic Genomics.]

    Steve Jurvetson is the partner who most associate with DFJ’s more disruptive startups. Is that still the case?

    Definitely. Within our three pillars, Andreas and Bubba lead our consumer efforts, I tend to lead the firm’s enterprise efforts, and Steve leads our disruptive efforts. But it’s player-coach; we all do deals that fall into all three categories; there [just happen to be certain partners] who push the thinking forward.

    Are you seeing many disruptive deals? What’s particularly intriguing to the firm of late?

    Well, we’d love to see a third of our capital [flow to disruptive deals] but it’s less than a third [owing to lack of opportunity]. We see lots of brilliant, revolutionary ideas, but they have to be achievable within a reason period of time or they’re just science projects. Of course, sometimes, it’s counterintuitive. When we did SpaceX, a lot of people thought we were nuts, that we’d headed down a 10-year-long rat hole. Now, it’s a very big company according to every big metric.

    One thing we’re seeing a lot of innovation around right now is dynamic systems, and specifically things that are using some kind of artificial intelligence combined with sensors and actuators. A self-driving car would be the best example, or autonomous robots that can walk over uneven terrain. We don’t have a huge number of [related] bets, but we’re really excited about the ones we have.

    Is there a natural ecosystem of syndicate partners for DFJ on these types of deals? Who else is looking most closely at “out there” stuff?

    There’s a small ecosystem of investors looking. Khosla Ventures and Founders Fund are two that jump to mind. I think Google Ventures and Google as a corporate entity have also been very forward leaning. But I think [that ecosystem] is getting broader every day now that firms are seeing successes like Tesla, which is valued at $30 billion.

    DFJ raised its newest growth fund last year. Do you have thoughts about some of the seemingly crazy valuations we’re seeing for later-stage deals? What’s your gut tell you about the health of the market?

    I think people like to predict doom too fast. If the market is soft, technology is ending; it it’s hot, it’s a bubble. The truth is always somewhere in between.

    The way I think about growth investments is less about valuation but total loss of principal versus partial loss of principal. When you buy Google or Apple stock, you could say the shares are highly valued, but you won’t lose all your money. The odds of Google going out of business in the next 10 years is probably zero. Even with a massive correction, Google maybe goes down 50 percent.

    [Similarly], with Workday’s last private round [an $85 million injection in 2011, about 20 months before it went public], it was doing $100 million in revenue. With [online real estate broker] Redfin, the [still-private, DFJ-backed] company isn’t too far off from doing $100 million in revenue. These are stable businesses with recurring revenue, so there’s not a lot of capital risk there; it’s just a question of how big your return is going to be.

    The deals where you could lose all your money in at a huge valuation – a Snapchat where you could literally lose [everything] if the company doesn’t figure out a business model or the next hot thing comes along and people move on – that’s what scares me.

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

    Connie

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  • A Bitcoin Bear in Silicon Valley, It’s True

    bull bearWell, yesterday was crazy.

    Newsweek published a story saying it had finally found the elusive original creator behind the digital currency bitcoin. People on Reddit then went nuts, arguing that the world should leave the guy alone. On Twitter, journalists then weighed in on whether Newsweek had put his life at risk, before a gaggle of them in L.A. (where the man lives) converged on his home, then chased him around town by car until he denied to reporters that he has anything to do with bitcoin.

    Plenty of investors appeared to be following the action, too. At Andreessen Horowitz, for example, at least three partners who are well-versed in bitcoin tweeted of their skepticism that Newsweek had the story right, with Balaji Srinivasan observing that bitcoin connoisseurs know that “there are vastly more credible candidates” than the 64-year-old California man that Newsweek turned up.

    So much of the day revolved around the story that you might think that everyone in the tech world is convinced that bitcoin will be as big as the Internet itself.

    You would be wrong, though.

    While venture capitalists often seem in league on Next Big Things, Josh Stein, a managing director at the storied venture firm DFJ, says that when it comes to bitcoin, he isn’t convinced of anything — even calling himself a “bitcoin bear” in an interview early yesterday (that I’ll run more of next week).

    Stein is a savvy investor who is known, among other things, for writing the first check to the online data storage company Box. It isn’t surprising that he doesn’t like advertising his position on bitcoin, which he says is personal and not a reflection of the firm’s interest. (He says others at DFJ are “looking at it.”)

    As he explains it, “I’m at a huge disadvantage to the bulls. Bulls have huge incentives to make elaborate arguments for why bitcoin is going to work. But I’m not going to short it, so I have zero upside [in discussing at length why it may fail].”

    Still, given that the “bulls” have had the floor for much of 2014 (Marc Andreessen in particular has been actively promoting the currency since his firm placed its first big bet on a bitcoin company, investing $25 million in Coinbase in mid-December), I pushed Stein for more.

    Noting that if Andreessen is right, he’ll “make a billion dollars,” and that if Stein is right, “I don’t make any money — so who do you think will spend more time refining their argument?” – he continued.

    “Look, why does everyone think bitcoin is going to work? Well, you say, it [offers] a lower transaction cost between existing systems. But anyone can [enjoy low to no costs] with ACH,” for Automated Clearing House, a widely used electronic network that allows financial institutions to process transactions in batches, transactions that are often free for customers.

    “People also say bitcoin is a hedge against inflation. And why? Because they say it’s like gold. But gold actually has value. People want gold, aside from its value, and that’s been true for thousands of years. Bitcoin has no intrinsic value. It’s electrons; it doesn’t exist.”

    Here, Stein abruptly stopped talking, noting that publicly stating his position on bitcoin would only serve to “cue the trolls.”

    I hope he’s mistaken. Forgive the pun, but there are two sides to every coin, and skepticism is a good thing; it strengthens the development of new technologies. Silicon Valley is often an echosphere. In just a few months, the tech cognoscenti have seemingly anointed bitcoin as the currency of the future. It’s refreshing to hear a VC challenge this new conventional wisdom and express a little doubt once in a while.

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    Connie

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  • DCM Reboots with a New Fund and Three Fewer GPs, Including Dixon Doll

    jason-krikorian-large-280In case you haven’t noticed, the global, early-stage venture firm DCM has been killing it in recent years. Since 2009, 15 of its portfolio companies have exited, many through highly successful IPOs. For example, DCM owned 20 percent of the China-based online retailer VIPshop when it went public in 2012 with a market cap of $600 million. Today, the company is valued at $8.7 billion.

    Eighteen-year-old DCM, which invests in the U.S, China, and Japan, doesn’t appear to be resting on its laurels. This morning, the firm is announcing its seventh, $330 million, venture fund. It’s also disclosing that longtime general partner Carl Amdahl and general partner and cofounder Dixon Doll will no longer be investing in new companies on behalf of the firm, a plan that has been in the works for several years, says general partner Jason Krikorian. (A third general partner, Gen Isayama, who opened DCM’s office in Tokyo in 2009, left last year to launch a new fund, which StrictlyVC wrote about in January.)

    On Tuesday, I chatted with Krikorian about the latest developments at the firm. Here’s part of that conversation, edited lightly for length.

    DCM clearly could have raised a bigger fund. Why didn’t it?

    For a few reasons. First, it has to do with where we think the sweet spot is, meaning the amount of money that [early-stage] investors should manage, and we think it’s between $50 million and $60 million per GP. [Editors note: DCM now has six active GPs.]

    This new fund also marks a bit of a transition for Dixon and Carl and it’s important for LP relations to have a long-planned out transition period; it’s part of the reason I was brought in [in 2010]. Also, it’s very tempting for funds to get bigger, but we think small teams operate better.

    DCM invests in three geographies. Which of them attracts the most of the firm’s capital?

    In the past, it’s really been balanced, with half in the U.S. and half in Asia, which is still dominated by China. Our returns in Japan have been good but there are far fewer startups to see; Japan still has a big company culture, so the best and brightest still go that route.

    You raised your sixth fund in 2010, but you assembled a couple of other side vehicles around the same time, right?

    Yes, we had raised [DCM VI] when I first joined, and we created two other funds simultaneously. One was an RMB (yuan) fund that primarily focused on later-stage China investments that we’d invested in [and wanted to back again]. We used that, for example, to invest more in both VIPshop and 58.com. It was a fund that we invested at basically $15 million a pop.

    The other fund was an Android fund that was backed by Asian-based corporates in China, Japan and Korea that viewed Android as a significant global opportunity. Some of the key LPs of that fund are [the Chinese investment holding company] Tencent, KDDI [which is one of Japan’s largest mobile phone operators], and NHN [which owns one of the largest search engines in South Korea].

    That fund has also been really great and given us a lot of flexibility to do deals where we put in a few million dollars at a valuation in the high, double-figure millions, including [South Korean messaging company] Kakao, which now has something like 95 percent penetration of the [regional] population. [Editor’s note: The WSJ recently reported that the company is talking with bankers about an IPO that would value it at $2 billion.]

    Will we see you raise similar side funds this time around?

    There’s interest [from LPs] as you might imagine, but we don’t have any definite plans to do [either]. We kind of view this new fund as a consolidation of those efforts.

    You had a personal win this week with the wearable device maker Basis, the first deal you led for DCM. How has the wearables and hardware space changed in the three-plus years since you made that investment?

    There’s a perception that this is a great time for hardware companies, and I think it’s true. There’s a more cooperative supply chain, [booming] capital markets, and a more favorable marketing environment with social media and blogs, so word gets out about great products.

    But I still think VCs are primarily funding the aggressive growth of the guys who’ve really broken out, so Fitbit, Jawbone, Nest. I still think there’s a lack of comfort around funding early-stage hardware companies pre-launch…because [a device] isn’t a Web service that can be tweaked. For instance, we backed Whistle [a health monitor for dogs] and 20,000 units just moved onto the shelves at [pet retail giant] Petsmart, and they have to work.

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

    Connie

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  • Ben Horowitz on the “Irrational Desire” to Succeed

    Ben HorowitzFor people with Andreessen Horowitz fatigue, things are about to get worse with the publication of co-founder Ben Horowitz’s new book, The Hard Thing About Hard Things.

    Here’s the hard truth: the book is outstanding. This reporter has never met a business tome she could finish; not so with Horowitz’s newest effort, which manages to be equal parts entertaining, harrowing, and instructive as both a business manual and as an autobiography. Even the pacing is excellent, helped in part by both emails and exchanges, like this brief conversation with Horowitz and longtime partner Marc Andreessen as their company, LoudCloud, appeared to be at death’s door: “Do you know the best thing about startups?” Andreessen asks Horowitz. “What?” “You only ever experience two emotions: euphoria and terror. And I find that lack of sleep enhances them both.”

    Horowitz talked with StrictlyVC about his new book late last week. Our conversation has been lightly edited for length.

    Some authors hire research teams to help with their books. Did you have support in writing this?

    I wrote it. It was a hard thing, but I kind of had to do it. [Freelance editor Carlye Adler, who recently co-authored a book with Yahoo’s chairman, Maynard Webb] edited it, so she kind of fixed a few things like grammar. The most corrections [owed to] my general tone, which was a little casual for the book. [Adler tweaked things] so it wouldn’t sound too street. [Laughs.]

    What made you think, okay, next month, I’m going to sit down and start work on this thing?

    It was combination of stuff. I kind of had this concept in my head, but the problem with management advice is that it’s highly related. Management is very dynamic, very situational, so any advice you give is based on your [experience]; it’s not general advice. People try to generalize it — and I try to generalize it, too — but without knowing where it comes from it’s not nearly as useful. So I thought the stories about where it came from and what I got out of it [would be helpful]. I had been planning to publish them [as blog posts]. But after [publisher] Hollis Heimbouch at Harper Collins found me on Facebook, I thought it might work better as a book.

    You’ve said the book’s proceeds will go to the American Jewish World Service to support women’s rights globally. Does that include your advance and royalties? For some perspective, can you share how much you were offered to write this book?

    The contract is confidential, but yes, it’s all going to AJWS.

    How long did it take you to write the book?

    It’s funny because when it first came up, I like was like, “I need to take a little time off to do this.” And everybody immediately said, “No. You cannot. You have to be here.” So it took a little longer than I would have liked, a little over a year. It was definitely a nights and weekends kind of thing, and I’d find some time in the day. But it was good because I remembered stuff in bits and pieces. There’s a story about [LoudCloud’s struggle to go public], when my wife was sick [with an extreme allergic reaction], and that was such a traumatic experience, I’d sort of blacked it out in my memory; it kind of [came back to me] late in the process.

    You have a lot of rich, detailed material in the book – dialogue, emails. Did you solicit help from your friends and acquaintances?

    Carlye helped me quite a bit with this. I’d made a list of all the people I’d worked with over the years, and she interviewed them about their experience and some of [the book material] came out of those interviews.

    The second half of the book provides pretty concrete advice for operators in a wide variety of tricky situations, though you don’t spell out how to engender loyalty. Many people from your past companies – John O’Farrell, Scott Kupor, Marc Cranney – wound up at Andreessen Horowitz. What’s the trick?

    If you really believe in the people who are working in the company and you believe they can be more than they can be — even more than they themselves think they can be — that comes through. And then if they grow [into that expectation], it becomes a very strong bond.

    I did an attrition survey at Netcape [Horowitz was put in charge of its enterprise Web server product line at age 29], and people leave companies for two reasons: People either hate their manager – that’s number one – or they’re just not growing or developing. Training is important, but it’s really about what the CEO believes about you. If the CEO doesn’t believe in what you can become, it’s hard for you to become it.

    When it comes to being a great CEO, what would you say are the top three qualities in order of importance?

    The number one thing is you have to have an irrational desire to build something. Any kind of rational reason for being in it gets pretty screwed up over time, because you end up in very bad situations now and again. I’d say the second quality would be the ability to find your courage at some point — the ability to stand up to a lot of pressure.

    And not quitting is probably number three. I think the only reason I stayed [with Opsware, which Horowitz essentially yanked from the ashes of LoudCloud and eventually sold for $1.6 billion] is that I didn’t quit; I stayed at it long enough that it worked out.

    You recently published an anecdote on your blog, which didn’t make it into the book, about how you avoided an options backdating scandal by not taking the advice of a well-regarded CFO you’d hired.

    Yes. People called the character and harassed her. She was actually grateful for the way I portrayed [what happened].

    Is there any danger that other characters in your new book will make a fuss? You write about one executive who was “born in the oilfields of Oklahoma, graduated from West Point, and was in charge of anyone who touched any servers at EDS,” which was one of your biggest customers at the time. We later learn that he lingers at airport bars to escape his work and family.

    I tried to run a lot of stuff by as many people as I could, because I [didn’t want to upset people]. I’ll bet I missed some, though. I think my biggest fears are that, and the acknowledgements. I know I didn’t acknowledge people who were a huge help, and I just don’t know how to go back [and do that now].

    How much of your adventures at LoudCloud and Opsware would you say owe to luck versus quick, reactive decision making?

    Luck played a major role. We had so much bad luck early – an overwhelming amount of bad luck – beginning with the whole change in macroeconomics. [LoudCloud raised tens of millions of dollars months before most of its customers were done in by the 2000 dot.com implosion.] Then we had tremendously good luck [i.e., Opsware’s eventual sale to Hewlett Packard].

    There’s no question that if a couple of things had gone a different way, we wouldn’t have made it.

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    Connie

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