• VC Manu Kumar on Lone Wolves

    Manu KumarWhen I first met Manu Kumar of K9 Ventures, nearly five years ago, he was a successful entrepreneur who was trying to break into micro VC and he was going it alone. As he said then, “I didn’t want to jump into partnering with someone just because it fulfills an LP criteria.”

    He still doesn’t want to take the plunge. Though Kumar went from investing a $6.25 million fund that he closed in 2009, to a $40 million fund closed in the summer of 2012, he hasn’t brought anyone aboard and that doesn’t look to change any time soon.

    Kumar – who writes initial checks of between $250,000 and $750,000 to very nascent startups with which he works closely — explained why over tea in San Francisco.

    Jeff Clavier [of SoftTech VC] recently said he’d never be a solo GP again. Apparently, you feel differently.

    Well, it’s true that K9 is one of the few solo GP funds without any associates. I don’t have a formal advisory network, either, though I do have people in my network who, when I’m looking at a deal, I’ll say, “Take a look at this and tell me what you think.”

    What’s the hardest part about operating the way you do?

    People say to me, “Your partner meetings must be really short.” But it’s more like they never end, because you’re constantly thinking about the companies and what they’re doing and what issues they have. I think the hardest part is just finding that balance between how engaged you want to get.

    Also, there’s no fallback. If I decide that I’m going to go to Tahoe for three days, there’s no one else who’s going to take my spot. If the companies need something, I still need to be accessible and available.

    So why not team up with someone?

    I answered my LPs this way: The risk of me adding a partner and that blowing up is much higher than the risk of me getting hit by a bus. I need to have a high degree of conviction before I invest in a company; the level of conviction I’d have to have in a partner would have to be an order of magnitude higher than that.

    Knowing what you know about being a solo operator, does it make you more or less inclined to fund single-founder startups?

    I’m not opposed to and am comfortable with single founders; I’ve seen lots of companies do well with them. It definitely requires more work, though. Probably the single-most important thing there is helping them to ride that emotional rollercoaster. If you’re on your own, you have no one to talk to.

    You’re investing a $40 million fund right now. Does that amount allow you to do seed, A deals, and Series B deals? I know the idea was to invest in roughly 30 companies.

    I typically pass on Series B and C, and some would have been great investments, but I can’t do that with the amount of capital I’m managing. [Among K9’s investments are the cloud communications company Twilio, the ride-sharing service Lyft, and the camera company Lytro, which have gone on to raise $104 million, $83 million, and $90 million, respectively.]

    Are you able to get your pro rata share of Series A deals? It seems like that’s becoming harder to do with seed investors’ strongest companies.

    It’s happened to me a couple of times where I haven’t gotten as much pro rata as I wanted in a deal. I’ve addressed that now by making it very clear to the founders, right at the time when I invest in them, that if I’m going to back them at the seed, they have to go to bat for me when it’s time [to raise more money]. They have to stand up to the next round investor, because the founders are the only ones who have the leverage in that situation.

    I don’t suppose the bigger VCs are willing to negotiate?

    In one case, I almost called up a firm and said, “Hey, you’ve invested in two of my companies. If you don’t give me my pro rata, you won’t get to get to see a third one.”

    What happened?

    In that case, I actually did get my pro rata [before resorting to that].

    Look, I don’t have any leverage now, but if you want good karma in the future, you better give me my pro rata. [Laughs.]

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  • Talking Turkey with Hummingbird Ventures

    Pamir GelenbeFrom a distance, venture capital in Turkey and the broader Middle East seems to be taking off. Among other things, in December, a Dubai-based investing duo announced they were forming a new, early-stage venture capital firm called Emerge Ventures to focus on Middle East startups. In January, renowned angel investor and entrepreneur Fadi Ghadour disclosed plans to launch a new venture fund to support startups in the Middle East and North Africa. And Earlybird Venture Capital, the 17-year-old, Berlin-based early-stage venture firm, announced that it’s raising a fund to focus on companies in Turkey and Central and Eastern Europe. (It has closed on $110 million so far; it’s targeting $130 million.)

    To get a better sense of what’s going on, StrictlyVC talked with Pamir Gelenbe, a venture partner with Hummingbird Ventures, a young, early-stage firm with offices in London, Antwerp, and Instanbul. Among the firm’s investments are Turkish game developer Peak Games, which has raised $18 million to date; and the invite-only shopping site MarkaVIP, which is based in Amman, Jordan, and has raised $15 million.

    So what’s happening in the Middle East? Why is there more activity suddenly?

    I don’t think there’s been any sudden step change. In fact, we’re excited about that part of the of world because we pretty much have no competition. There are a few funds (including recent entrant Doğa Ventures, founded in late 2012 by famous Turkish businessman Fethi Şimşek). But the competitive intensity in the Bay Area is probably one hundred times what we’re facing.

    Are you seeing much innovation? And how’s your deal flow?

    It’s okay, but you have to be patient. Some startups copy earlier successful models. A few have developed something truly innovative, and we advise them to move their headquarters to the Bay Area to develop their go-to-market approach and maybe to get acquired, because that isn’t going to happen if you’re sitting in Turkey or the Middle East.

    In the grand scheme of things, the scene is pretty small, but entrepreneurship is definitely on everybody’s mind. In Turkey, there are probably two or three entrepreneurship conferences every week. It’s become a big thing. And there are maybe a dozen local VCs in Turkey who are serious and another dozen external VCs who are looking on a regular basis.

    What about the rest of the Middle East?

    Halve those numbers. The Middle East is very fragmented; it’s 20 countries or so, so unless you’re in digital media, where regulation is immaterial as long as you don’t show profane pictures, you’re fine. But if you’re dealing with e-commerce, you’re dealing with customs and every state’s regulations, and it becomes pretty hard.

    In Turkey, e-commerce was really hot then cooled somewhat. Why?

    Turkey has a strong logistics network, with the largest fleet of trucks in Europe and very good roads that cover the whole country. It also has a great payments infrastructure. It’s much better than in the U.K., where until recently, you couldn’t send instant transfers between banks but had to wait two days instead. [Turkey] has just leapfrogged all this legacy technology that people have in Western Europe.

    But e-commerce has become extremely competitive, with razor-thin margins across the board, so it’s less exciting [to us] as investors.

    What have been some of the bigger exits out of Turkey?

    eBay bought the Turkish eBay clone [GittiGidiyor in 2011]; Naspers bought [the private online shopping club] Markiphoni [in 2011 for a reported $200 million]. Just this month, a British mobile payments company called Monitise, a public company, announced that it’s acquiring [the Turkish mobile commerce company] Pozitron for $100 million.

    You just spent a year living in Instanbul with your family. What were your impressions of it? There’s obviously been a lot of unrest.

    Turkey is seeing a crazy pace of urbanization, driven by developers with fairly limited supervision from the government, so there’s no green space in Istanbul. I worry that they’ve built this thing that’s unlivable.

    The macro [picture] is also very hard. There are questions about the application of the rule of law. It’s been a rocky 12 months in terms of internal politics.

    At the same time, it has good fundamentals, a pretty good infrastructure and an educated population. And people are very fast in Turkey about getting things done. Maybe people are jumpy because they’ve been rocked by economic crises over the years, so people know that you get things done now — you don’t wait until tomorrow. That’s the way things work there, though. My clock speed always goes up a few notches when I’m there.

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  • Jeff Clavier on “When to Push and When to Pull”

    Jeff Clavier.2This week, StrictlyVC sat down with investor Jeff Clavier of SoftTech VC to talk shop. Yesterday, we featured part of that chat, with Clavier discussing the less glamorous aspects of his work, from expensive mistakes to entrepreneurs who don’t exactly hang on their investors’ every word.

    In this second installment, Clavier shares his insights into what’s happening in seed-stage investing, where SoftTech has been playing since its 2004 founding.

    You aim to own five to 10 percent of each startup that you back. Why is that the right range? Why not invest in fewer companies for slightly more ownership?

    It works because if you try to own 20 percent of a startup, there’s no room for syndication, and we believe fundamentally that the core proposition of the seed stage world is to own enough that any outcome is meaningful, without using any sharp elbows.

    But you have to partner with other investors who are adding value. There’s always a lot of work to do in seed deals, and it often goes on for a year to a year-and-a-half (before the company raises more funding or starts to wind down). And it screams at you, what investors haven’t done because a startup is one of 100 other startups they’ve backed.

    Are you finding that Series A investors are being any more or less accommodating of seed investors in today’s market?

    If there’s one term sheet, then you have to face reality [and take their terms]. If it’s a multiple term sheet situation, then you have a negotiation. If you come in with a convertible note, then you’re stuffed, because there’s no pro rata right, and the VCs will basically tell you to go f off. At least, some of the best and most aggressive will.

    What’s been your experience specifically?

    We’ve done well recently. In the last four months, we’ve [seen 10 of our portfolio companies close] Series A rounds and five [of them close] Series B rounds. A top-tier firm did three of our Series A [deals] and we could only get pro rata in one. But I don’t think that’s a new development; it’s happened all along. Everything is a negotiation. [Larger funds have to weigh] how big a spot they want to leave you in the cap table versus their own ownership requirements. But it’s not like we won’t deal with those guys again. If you have a reputation, people don’t want to f__k with you. You just have to know when to push and when to pull.

    These days, seed investors often own 20 percent of a startup by the time it meets with more traditional VCs. Is that becoming a problem?

    It’s true that when companies come to traditional VCs, the cap table has a chunk of 20 percent [up] from 5 percent. But it is what it is. The companies that come to them have been de-risked. Seed is the new A, and A is the new B. We’ve seen this [directly]. We’ve [participated in] traditional Series A [rounds], between $4.5 million and $6 million; we’ve also done Series A [rounds that are] between $8 million and $10 million. We’ve had a $15 million Series A round.

    How big a check will you write to maintain your stake in a startup?

    Well, we’re always trying to… generate 10x on a seed, Series A or Series B investment … One of the biggest checks we’ve written was $1.6 million in Vungle [a mobile ad startup that makes 15-second in-app videos]. Vungle just announced a $17 million Series B at a pretty hefty valuation [led by ThomVest Ventures], and we participated in full.

    Do you feel like things are working in the industry, structurally?

    There is so much institutional money that the funds being raised have to be put to work somewhere, so a lot of entrepreneurs are being funded who shouldn’t be. But it’s always hard to know who [should receive follow-on funding]. Somebody’s piece of junk is someone else’s Pinterest.

    Is there bifurcation happening in seed investing? We’re hearing more about early seed and seed prime and seed extension deals…

    No. You have incubators, which is a sh_t show now, there are so many of them. You also have early-stage funds like [K9 Ventures, whose founder, Manu Kumar] is almost like a quasi-founder.

    We really value the fact that Manu is working with entrepreneurs at that ideation phase. But we don’t typically do it. For example, when we invested in Coin [a card-shaped connected device that contains users’ credit, debit, gift, loyalty and membership card information], we saw a big, bulky piece of plastic. But at least we saw plastic. When Manu got involved, there was nothing but a vision.

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  • The Deal on Being a Micro VC, with Jeff Clavier

    Jeff ClavierJeff Clavier once worked for the venture investment arm of Reuters. But he decided he might do better on his own by sprinkling tiny amounts of money across what appeared to be a new crop of capital-efficient Internet companies. It was 2004. Sitting with Clavier at Founders Den, a popular clubhouse for San Francisco entrepreneurs, Clavier recalls that at Reuters, he’d made “some, but not a lot of money,” making the $250,000 that he and his wife set aside to stake his fund, SoftTech VC, “a nontrivial risk.”

    Fast forward, and that gamble appears to have paid off. Clavier turned his first $1 million fund into a second $15 million fund in 2007, then a $55 million third fund in early 2012. Clavier isn’t speaking about fundraising, but judging from the firm’s most recent SEC filing, an $85 million fourth fund is around the corner, too.

    “It was a crazy thing to do, but it worked,” shrugs Clavier, an unrepentant Frenchman. To date, roughly 20 percent of SoftTech’s 144 portfolio companies have been acquired, including the financial service Mint (Intuit), the online shopping services Kaboodle (Hearst), the content company Bleacher Report (Time Warner), and the game maker Tapulous (Disney).

    Given how many people seemingly want to be known as “micro VCs” these days, this reporter asked Clavier to elaborate on what the job really entails. (Tomorrow, I’ll feature more on Clavier’s portfolio and his thoughts about the current market.)

    What’s the biggest misconception about what you do?

    I think people have to understand that it’s harder that it looks, and that while people might give you [a small bit of capital first fund], you really need to be successful to be allowed to raise a next fund.

    Everyone thinks: I was a successful angel; I can be good at managing a micro fund. But the answer is no. Being an angel means having a good nose, being at the right place at the right time, and putting in small amounts of money after you’ve made quite a bit of money yourself, so that you’re not really risking anything. But managing other people’s money is a massive responsibility. Too often I get calls [from budding micro VCs] like, ‘Dude, I have this report to issue,’ or ‘Should I audit my fund?’ And those are panicked calls.

    Have we reached a tipping point? Are there too many seed-stage funds?

    There are so many. And I’m more than welcoming to the industry, but you wonder what people are thinking when they want to start yet another micro VC fund. The market doesn’t need it. [As it stands], there will be a contraction at some point.

    What are some mistakes from which you’ve learned?

    To be honest, the biggest mistakes we’ve made are the companies we’ve passed on: LinkedIn, Twilio, Airbnb, Square Pinterest. All of those were in our hands, and we said no.

    Wow.

    You make mistakes. It’s your job to see everything, and hopefully make enough right decisions enough times that you make money for your investors.

    The challenge for very early stage investors is that when we see things, they’re pretty ugly. They don’t work yet. Sometimes, we just fall in love with the entrepreneur and we nail it. But take Airbnb. I heard of it when it was AirBed & Breakfast and they were selling a service that helped you get an air bed at someone’s place when you went to [an out-of-town] conference. Hmm [said mockingly], let me think. [Laughs.] And it was a total screw-up.

    Any other missteps that might be instructive?

    One of the mistakes I made, I think, was that I stayed on my own for too long. I don’t think I was clear on the real opportunity to build a firm around this strategy until around late 2008, 2009. Then I brought on my awesome partner Charles [Hudson] in 2010. [Clavier soon after added principal Stephanie Palmeri.]

    I wouldn’t do the solo GP thing again. But my own evolution has been defined by the fact that I started 10 years ago, when the only mentor I had at the time, because he’d gotten going slightly earlier, was Josh Kopelman of First Round [Capital].

    What else should those who want to follow your path consider doing?

    First, I’d say open a new bank account, define a budget, say $250,000, and give yourself 25 shots of $10,000 to invest over two or three years. Take your time, but forget about that money because the most likely outcome is that you lose everything, and if it comes back, it will take a long time; most exits take seven to nine years.

    Beyond that, try and figure out whether you’ll be good at being a coach: supporting, helping, kicking, yelling a bit if needed, being tough, but not driving, because entrepreneurs don’t work for you and often don’t listen to you.

    You also have to be really good at context switching, depending on the size of your portfolio, switching every half hour to an hour from one company to another to another, always on the lookout for portfolio value add [like new hires]. You have to be happy to work 10 to 12 hour days, then do email and still go to bed feeling like you’ve accomplished nothing because it’s so varied that having a sense of achievement and success is nearly impossible.

    You’ve noted that mistakes are inevitable. But are there any “tells” when it comes to good or bad founders? Any unifying threads?

    No, you can never predict. Sometimes we look back at teams we backed and we say, what the f__k were we thinking? It was just so obvious those guys would fail, but of course, when we invested, we didn’t feel that.

    It is really good to know what you’re good at and what you’re not good at. We made a couple of investments in next-generation e-commerce companies that literally got obliterated and we lost close to $1 million, twice, and that sucks. We actually stay away from that category now, the subscription thing, we’re done with it. It isn’t that there aren’t good types of companies; we’re just not good at sniffing those.

    Anything else people should expect to experience?

    For anyone getting going in this industry, they have to be clear that bad news comes first. So you invest in a company, and if it’s a really crappy deal, within six months to a year, you’ll have to tell your investors you lost their money. And unless there’s something exceptional happening in the portfolio where you have a very early win, you will have bad news after bad news after bad news until you get some good news. You have to have the guts to say, “This is why we failed and this is where we screwed up.”

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  • The Lesson of Jim Goetz: Great VCs Make Their Own Luck

    Jim GoetzPeople may be surprised that low-profile Jim Goetz of Sequoia Capital just landed the largest-ever acquisition of a venture-backed company. They shouldn’t be.

    Researchers have shown that superstar investors are remarkably consistent over time. In fact, when it comes to predicting which startups will be successful, individual VCs are roughly five times more powerful as leading indicators than the firms for which they work, according to a study published last May by Harvard and Carnegie Mellon academics. (The study controlled for all kinds of deviations, including industry, investment amount, the amount of experience of the VC at the time of the investment, and the age of the startup itself.)

    As one of the study’s authors, Matthew Rhodes-Kropf, told me when the study was first published, “The guys who know how to get big exits get big exits no matter where [they’re employed]. The guys who fail are pretty consistent about that, too.”

    Goetz is clearly one of the guys in the first camp. An entrepreneur who later became a general partner at Accel Partners, Goetz scored numerous hits for the firm, including Perbit (sold to Juniper), Rhapsody (acquired by Brocade Communications), and Entrisphere (sold to Ericsson). Goetz was so good, in fact, that in 2004 Sequoia Capital hired him away from Accel.

    Lucky Sequoia. Facebook’s $19 billion acquisition of WhatsApp could mean as much as $3.4 billion for Sequoia’s LPs, given that Sequoia invested a reported $60 million in the company across three separate rounds for an ownership stake of as much as 19 percent. And it’s just one of the big exits that Goetz has provided Sequoia. He led the firm’s investment in AdMob, which raised less than $50 million and was acquired by Google for $750 million just three months later; and he was also the force behind Jive Networks, Nimble Storage, and Palo Alto Networks, all of which have enjoyed successful public offerings.

    Another Accel partner, Peter Fenton, has followed a remarkably similar trajectory as Goetz. At Accel, Fenton quietly amassed a portfolio of 10 startups, later helping to sell two of them — JBoss to Red Hat and Wily Technologies to Computer Associates — in hugely successful outcomes for Accel.

    In mid-2006, Fenton was also headhunted by another VC firm – in this case, Benchmark Capital. At Benchmark, Fenton has continued to knock the ball out of the park. Two of his more prominent investments include Yelp (which went public in 2012); and New Relic, which was valued at $750 million in a funding round a year ago. In addition, Hortonworks and Zendesk are expected to go public in the near future. And did we mention Twitter? Fenton sits on its board and will reportedly net hundreds of millions of dollars personally alongside Benchmark, which owned 6.7 percent of the company at the time of Twitter’s November IPO.

    Goetz and Fenton aren’t lucky; they’re consistent. And their success may encourage more firms to poach star players, particularly if their LPs have anything to say about it. Brian O’Malley, a rising star at Battery Ventures, was recently lured over to Accel. With Goetz’s big deal, other firms are surely poring over other firms’ rosters in search of their own superstars.

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  • Waiting for Seed Funds to Sprout Cash

    sproutsOver the weekend, venture capitalist Marc Andreessen tweeted, as part of a broader conversation, that there are “definitely too many new small angel funds. That seems clear.”

    The comment kicked off a spirited debate on Twitter about small funds and their perceived merit. But if anyone knows what’s happening in the broader world of seed funds, it’s Michael Kim of Cendana Capital, a four-year-old investment firm that has made its name by backing micro funds, including Freestyle Capital, Founder Collective, IA Ventures, K9 Ventures, PivotNorth Capital, Lerer Ventures, SoftTech VC, and Forerunner Ventures. Kim, whose firm is managing around $90 million and is raising a fresh $55 million, talked with StrictlyVC yesterday about what he’s seeing.

    You’ve backed lots of micro VC firms. What’s your criteria?

    We look for groups that lead or co-lead their deals. There are plenty that just chip a bit into a seed round. But for us, it’s really important that the funds we invest in focus on ownership and on being the largest investors [in a startup’s seed round], as well as having substantial reserves. We’re looking for a firm that does three to five deals a year, putting in a million dollars [into each deal] and owning 15 to 20 percent.

    Most of your funds are in the Bay Area. Is that by design?

    We do think about the ecosystem: it has to feature high-quality entrepreneurs, high-quality co-investors, and lots of opportunity for follow-on capital. So L.A., for example, doesn’t have a good seed ecosystem; it’s too reliant on the Sand Hill Road crowd to fund its companies.

    More funds has meant more specialization. Is that a good thing or do some micro VC fund managers run the risk of backing themselves into a corner?

    I think it’s very important to stake out what your value-add is. Forerunner Ventures specializes in digital commerce, so pretty much anyone who starts in that space wants to meet with [founder Kirsten Green]. IA Ventures is known for being a big data investor; Founder Collective is known for being [comprised of] ex-entrepreneurs who want to help other entrepreneurs. Assuming it will become a much more competitive world, any seed fund really needs to think about its market positioning.

    How many micro VC funds are you aware of?

    A lot. When I started Cendana, the clear pioneers were Steve Anderson [of Baseline Ventures], Michael Dearing of [Harrison Metal] and Mike Maples [of Floodgate]; but I’ve probably met with or interviewed more than 260 groups since then, mostly in the U.S., because we don’t invest outside of the U.S., but also from Russia, Turkey, Berlin, China.

    It seems like many more micro VC funds are being founded by venture capitalists.

    A subset of them are definitely younger VCs from more established firms, which is an indictment of a lot of big firms that haven’t done enough about succession issues.

    Tim Connors [of PivotNorth] was at Sequoia and [U.S Venture Partners]; Chris Rust was at USVP and is starting a fund; Mamoon Hamid [also formerly of USVP] quit to join [former Mayfield Fund and Facebook exec] Chamath Palihapitiya at The Social+Capital Partnership; Aileen Lee left Kleiner Perkins to start Cowboy Ventures; Matt Holleran left Emergence Capital to start a fund [called Cloud Apps Management, which focuses on cloud business applications management]; Ullas Naik left Globespan Capital Partners to start [Streamlined Ventures, a seed-stage investment firm focused on infrastructure software]; Kent Goldman has left First Round Capital to start his own thing.

    Do you think VCs who launch seed funds have an advantage over ex-operators who launch seed funds?

    We think entrepreneurs have the most credibility with other entrepreneurs, because they’ve built their own companies.

    The one element I’m wary about is a lot of ex-entrepreneurs’ [experience]. A lot of them haven’t seen investing cycles, and one of the quickest ways to destroy a portfolio is through follow-on rounds – investing so that you suddenly have a $2 million hole instead of a $500,000 hole [from an initial investment]. So they have to have discipline about follow-ons, bridge financings and the like.

    How are all of these funds doing? Is it still too early to know?

    They look promising. A lot of the established players I mentioned [like Baseline Ventures and Floodgate] and older groups like First Round have promising portfolios. But in terms of returns – aside from [Baseline], which had a huge hit in Instagram – I suspect a lot of it is [high but unrealized IRRs]. Things have been marked up hugely on paper, especially if you’re in Uber or Pinterest. But LPs are very focused on cash returns, and while last year was a great year for venture firms like Greylock, Accel, and Benchmark, which returned substantial capital back to LPs, there aren’t a lot of seed funds that could say [the same].

    In the meantime, can things possibly remain as collegial as they have in past years between seed investors?

    A lot of new seed funds are relatively smart about focusing on ownership. At the same time, you can’t have four funds trying to get 10 percent [of a startup]. I do think we’ll see some sharper elbows.

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  • Innovation in Snapchat Time

    Nikos-BonatsosThere’s been a lot of talk of “ephemerality” in tech circles lately, driven in part by the rise of Snapchat, the popular mobile app that allows users to send self-destructing messages and images. But Niko Bonatsos, a principal at General Catalyst Partners — which participated in Snapchat’s A and B funding rounds — thinks the trend is becoming ubiquitous and that Internet startups have less time than ever to prove themselves before their window of opportunity slams shut.

    Yesterday, I chatted with Bonatsos about the “rapid decay” of so-called digital assets, with Bonatsos noting that our loyalty to digital products is at an all-time low. To prove his point, Bonatsos ticked off a list of “digital” companies to fall from their perches, many disrupted in the span of five years or less (think MySpace, Blackberry, and Firefox, among others).

    Bonatsos also pointed to mobile phone apps, noting that more than half the top 100 Android and iOS apps today didn’t exist just a year ago, and that the lists are almost entirely different than two and three years ago.

    “Unlike 10 years ago, when we still had product life cycles, today, [users migrate to a new technology] as more of an impulse, and there isn’t a lot of time to act if your product isn’t perfect. People will just migrate to the next form factor, the next paradigm.”

    I asked Bonatsos how this constant migration of users is impacting the way he invests. After all, what’s to say people won’t move on from Snapchat to some other app that gains their confidence? He said Snapchat serves a core human need right now – to be authentic and express ourselves privately — which is one of his firm’s criteria. Bonatsos said another buffer against fickle consumers is to back companies that are “used every day to solve a real world problem.” Here, he pointed to Uber, which has largely replaced the frustrating process of calling a cab, and the travel metasearch engine Kayak, a General Catalyst portfolio company that was acquired by Priceline last May.

    Still, he noted that it’s never been so important for digital startups to “be on top of their numbers” to “deeply understand the intensity of [their users’] engagement,” and to “be smart [and] leverage user acquisition channels really early on, when they are cheap.”

    Bonatsos – who was raised in Athens and holds engineering degrees from Stanford, the University of Cambridge, and the National Technical University of Athens — acknowledged that all of it is “easier said than done.” He also said that startups typically have “some time” to take action if their metrics aren’t heading in an ideal direction — but not much.

    “Even when something becomes mainstream,” he said, “the clock is ticking.”

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  • Almaz Capital: From Russia With Love

    Geoffrey BaehrIt’s easy to poke fun at Russia as the land of graft, corruption and side-by-side toilets. But you quickly get the impression that six-year-old Almaz Capital — an early-stage venture firm that has offices in Menlo Park and Moscow and is focused on bridging the two worlds – has been laughing all the way to the bank.

    I talked with Almaz general partner Geoff Baehr yesterday afternoon to learn more about Almaz and how it handles not entirely flattering perceptions about doing business with Russia. Our conversation has been edited for length.

    You were a chief network officer at Sun Microsystems, then spent a decade or so with U.S. Venture Partners. How did you wind up at Almaz?

    At Sun, in 1990, we decided to go [abroad] at the fall of the Soviet Union to find the best engineers we could find. And the first guy we met was [Almaz founder] Sasha Galitsky, who was the chief engineer overseeing 1,500 engineers at the Soviet Space Agency. He eventually left to start a 20-person company and that was [Sun’s] first investment outside of the U.S. Sasha and I have known each other since.

    What makes it work is the fact that Sasha is a very well-connected guy who’s very visible in Russia and was one of the first VCs there.

    Almaz was an early investor in Yandex, the now-public Russian Internet company. Do all of the firm’s investments have to have ties to Russia? And what percentage of your deals have originated in Russia versus the U.S.?

    Many do have engineering [hubs] in Russian and build out sales and marketing here, or we fund companies here that are building for the Russian market. Some of our LPs require that there be a Russian angle — that’s why they gave us the money. But we don’t try to [orchestrate] unnatural acts. If it’s a really good company here in the U.S., we’ll do it [regardless].

    About 75 percent of the [dozen or so] companies from our first fund originated in Russia, but by and large the focus has been to go global.

    What are some of the advantages of knowing Russia so well?

    For one thing, the educational system in Russia during Soviet times was exceptional; there would be an entire institute focused on statistics or higher mathematics, kind of like single-subject graduate schools. And there are still pools of talented people with specialized knowledge that you can avail yourself of.

    Most American people also have no idea how tightly you can draw a belt around your waist. In terms of lean, you haven’t seen lean until [you’ve seen Russian entrepreneurs]; they’d eat their own shoe leather. They worry this might be the only shot they’ll get, so they watch where every dollar goes.

    Yet there’s always concern over who controls what in Russia. Do you have to overcome those worries?

    We always deal with the “those Russians” question. Sure, there’s a perception that there’s problems with graft and corruption. But entrepreneurs manage to survive and do well and things are always evolving. I was at a massive conference in Moscow and the Premier was there taking questions and this one guy put up his hand and said, “I’d like to point out that all the entrepreneurial [tech] successes out of Russia have done their flotations outside of Russia and kept their intellectual property outside of Russia.” A whole bunch of people moved away from this person as he was talking, by the way. [Laughs.] But the Premier said, “We’ve only been doing this for 25 years. We’re working on it but it evolves at the pace that it evolves.”

    At Almaz, we don’t do business with oligarchs. We have very professional LPs that include Eric Schmidt, the World Bank, and Cisco, and we operate a very straightforward model using only top-tier financial to legal firms. If someone says “those Russians” and our name in the same sentence, we’re toast. Our reputation is everything to us.

    I understand you’ve almost closed a second fund that’s much bigger than your first, $79 million fund. Can you comment? Also, any lessons learned at Almaz that were new to you, even as a longtime VC?

    I can’t comment on the new fund, I’m afraid. As for lessons: We had a saying at Sun that you should work with people you like, have fun, and maybe make some money. And it’s true. There’s a lot to be said for working with someone for whom you have infinite respect and who you consider a lifelong friend. There are worse jobs.

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    Connie

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  • Dana Stalder: Why $1.5 Million Seed Rounds No Longer Work

    Dana StalderDana Stalder, a Palo Alto-based general partner with Matrix Partners, is quick to note that he is “not a career VC.” In fact, he has spent much more of his career inside tech companies, from Netscape in the mid ‘90s, to the early online lead generation company Respond.com, to eBay, then PayPal, where he was a senior VP in charge of product, sales, marketing and technology when Matrix lured him away in 2008.

    Still, Stalder isn’t shy about sharing some pretty specific ideas about the industry. When talking fund sizes, for example, he implies that funds that have grown far larger over time might be just a leetle motivated by management fees. Matrix, which has raised three $450 million funds in a row, is “less opportunistic about making money and more focused on helping build category-leading companies,” he says.

    He also thinks that the days of the $1.5 million seed round – which became the norm around 2009, driven by ballooning numbers of seed investors – are nearing an end.

    “It’s hard to build a business or prove that you can get a good markup off the back of that amount,” Stalder says. It’s also “terrible for the entrepreneur,” who winds up giving away up to 25 percent of the company over the course of a seed round and a seed extension round.

    “Basically, they’re stuck in this no man’s land – running out of money without enough runway to take off – and they have the anxiety of having to bridge two rounds of seed funding for basically the same [dilution] as they’d [see with a Series A investment],” he says.

    Stalder is an early-stage investor, so perhaps it’s no surprise that he thinks the “million-dollar seed round will come under pressure,” or that early-stage fundings will “revert back to the norm, which was the multimillion-dollar first round.”

    A movement in the direction of larger first rounds would presumably benefit Stalder, who tends to invest in two companies a year and has led investments for his firm in both Zendesk, a help-desk software-as-a-service company, and online retailer Gilt Groupe, both of which are reportedly planning IPOs this year. (Before seed-stage investors changed the ratio, entrepreneurs had no choice but to give their business to venture capitalists.)

    The news isn’t all rosy for Stalder. Thanks to seed investors, who have played a big role in grooming nascent companies and scaling them for investment, VCs now have the luxury of more information, acknowledges Stalder. They’ve grown “more accustomed to focusing on traction signals, and that wasn’t the case five years ago.”

    Still, he suggests that that the trends towards larger deals will ultimately pay off for everyone.

    “It might mean more syndication among the small seed funds,” says Stalder. “It might also mean that slightly fewer businesses get started.” Either way, he says, “Bigger rounds feel inevitable to me.”

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    Connie

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  • Bullpen Capital on Its New Fund, Post-Seed Deals, and Changing LP Sentiment

    bullpen capitalA few years ago, when three prominent operators came together to create a venture fund, Bullpen Capital, they figured they’d line up capital easily. Paul Martino has founded four companies, including the ad optimization platform Aggregate Knowledge; Richard Melmon cofounded Electronic Arts; and Duncan Davidson cofounded Covad Communications and SkyPilot Networks.

    LPs couldn’t care less. “We had meetings where we were hollered at for an hour,” Martino tells me of their lives in late 2010, when industry returns had sunk to a 10-year low. “Even though we were each running companies [through the late ‘90s and the 2000s], “it was like we’d wronged [LPs] by proxy. One guy even said to me, ‘Venture capital isn’t an asset appreciation class; it’s an asset destruction class.’”

    Fortunately for Bullpen – and LPs – times have changed. In a few weeks, says Martino, the Menlo Park, Ca., firm will hold a first close on a second fund that will ultimately be “between $50 million and $75 million,” up from its first, $25 million fund (about one-third of which came from Martino, Melmon, and Davidson). We talked yesterday about that new fund, and how Bullpen separates itself from the pack. Our conversation has been edited for length.

    You say you’re positioned to double, if not triple, your first fund. How have you won over LPs?

    Well, for one thing, we’ve made 33 investments, and four of them could [return] the whole fund [based on their IRR]. Also, LPs want to know how you’re going to differentiate yourself from the many other small funds they’re seeing, and we have a stage focus that only two or three other funds out there share.

    LPs also want to catch the next Mike Maples; they want to buy an option to get into your later funds. Instead of writing a $25 million check to one firm, they’ll write five $5 million checks with the hope that they might be able to give [the best of those small funds] $50 million the next time. There’s a fear of missing out, that they don’t have exposure to the best managers of the future.

    It seems like more firms are making follow-on investments in seed-funded startups. Venture51 is doing something similar, right?

    And they’re our best friends and most common co-investors. I’d hate if there were 23 firms doing what we’re doing, but we need partners and there just aren’t a lot of us doing this. When we’d learned Ronny Conway might be raising a fund to back seed-funded startups, I wrote him a note saying, “Welcome, please go do this.” Companies bumble and stumble, and we’re big believers in the power of strong syndicates. A few more of us would be a good thing.

    What’s your criteria? Does your interest extend to good teams that need to come up with a new idea?

    Investing in pivots would be like seed investing again. Instead, we invest in post-product market fit companies where big VCs say, “Come back in six to 12 months when you have a million users instead of 100,000.” We’re like an accelerator that gets the companies to the milestone that guarantees them the big round.

    What do you get in return for your check? Are you aiming for 10 percent?

    We’re like Greycroft Partners in that we have no ownership requirements – and that has helped us win 87 percent of the deals we’ve tried to get into. Sometimes, we [own] 3 or 4 percent; sometimes it’s 7 or 8 percent.

    You’ve told me you don’t take board seats, either. Does that concern LPs?

    LPs don’t like it but GPs do. Duncan and I have started 14 companies so we’re viewed as trusted advisors, rather than as a firm that’s going to potentially force the CEO’s hand. It puts us in a better position. We just led a round in an ad tech company and the week before one of its board meetings, I was asked, “What do you think the board is going to think of this presentation?” It’s a better situation to be in than the person who’s getting a distilled view of the company.

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    Connie

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