• In VC, Going it Alone, with Plenty of Company

    standing aloneA growing number of venture firms have been springing up around a single general partner, including PivotNorth, led by Tim Connors; Acero Capital, led by Rami Elkhatib; Cowboy Ventures, led by Aileen Lee; and K9 Ventures, led by Manu Kumar. 

    Now add to the list Cindy Padnos, the lone GP of Illuminate Ventures, an Oakland, Calif.-based outfit that is today announcing a new, enterprise-focused, $20 million fund. In a call on Monday, Padnos said she was able to raise the new pool after investing a “few million dollars” in an earlier, proof-of-concept “Spotlight Fund” that has taken off.

    Two of Spotlight’s five portfolio companies have been acquired: 3D game design platform Wild Pockets was purchased by Autodesk in 2010, and data and audience management platform Red Aril was acquired in 2011 by Hearst Corporation. (Terms of both deals remain private.) Meanwhile, the fund’s three other portfolio companies have been marked up considerably since Padnos invested. Among them: the SEO management platform company BrightEdge, which Illuminate backed as a Series A investor; the startup has gone on to raise nearly $62 million altogether, including from Battery Ventures, Intel Capital, and Insight Venture Partners.

    Padnos – a Booz, Allen consultant turned operator turned venture capitalist – gives a lot of credit for her success thus far to a venture partner in Seattle and an advisory counsel of roughly 40 people whom she has assembled over the years.

    She also believes she has struck on a strategy that clicks in a today’s market, investing in enterprise startups that are bootstrapped or angel financed but not quite ready for a large-scale Series A rounds.

    Indeed, Padnos — who says her “sweet spot” is writing initial checks of $500,000 as part of $1 million to $3 million rounds — has already made several new investments out of her new fund: Hoopla, a company that makes “workplace gamification” software; Influitive, a marketing company that analyzes data around social media; and Opsmatic, the newest startup by former Digg CEO Jay Adelson.

    Asked whether she is seeing any particularly interesting trends, Padnos tells me she’s most closely watching the “whole world of enterprise mobile.”

    But the growing group of single-founder firms that Illuminate has joined is fairly interesting, too.

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  • Turning Bain Capital Ventures Into a West Coast Player

    SalilSalil Deshpande, who spent seven years as a venture investor with Bay Partners, joined Bain Capital Ventures in March of this year, and he’s been working hard ever since. Deshpande is hoping to replicate his successful track record, with hits that include early investments in Buddy Media (acquired by Salesforce.com last year for $689 million) and the peer-to-peer lender LendingClub (now valued at more than $1.5 billion). Working alongside Bain’s one other West Coast managing director, Ajay Agarwal, in the firm’s Palo Alto office, Deshpande also wants to help Bain establish a stronger presence on the West Coast venture capital scene. I met recently with Deshpande to see how it’s going. Our conversation has been edited for length.

    How active is Bain Capital Ventures, and what size bets are you making?

    We’ve been very prolific; we’ve closed five deals in the last three months that haven’t been announced. We’ve announced a dozen others, including Aria Systems, a company that lets companies do recurring revenue management. We just led a $40 million round in the company.

    As for range, our smallest investment has been $250,000 and our largest has been $55 million in one company.

    How much are you investing, and how many partners does Bain Capital Ventures have altogether?

    We’re currently investing out of a $660 million fund raised in 2012. We raise a new fund every two-and-a-half years or so, so the pace of investing is high. We have nine managing directors: two here, six in Boston, and one in New York.

    Do the nine of you have to agree on every deal?

    First, we classify deals as early or growth. With growth deals, everyone who wants to come and do the work is invited. When it comes to early-stage deals, there are just five managing directors [who decide whether or not to move forward]. And the managing director who is sponsoring the deal decides on who the four other people will be.

    Don’t partners then choose only those individuals who they think will support a deal?

    Not necessarily. I always pick partners who will be critical and have the most knowledge and understanding about the deal. I don’t want to do bad deals. And these are some of the smartest guys I’ve worked with.

    Is it hard, trying to establish Bain as a venture entity in this crowded, West Coast market? 

    There are pros and cons. Bain is a very strong, positive brand. It stands for private equity, large deals, buyouts. It stands for discipline, thoroughness, thoughtfulness, [and] being data-driven. We’re also known for philanthropy work in the Boston community.

    The challenge is that the brand stands for something that doesn’t correspond exactly with what we’re trying to do [out] here, where you have to be a little faster [and] a little more responsive to the market. But the nice thing is that things are really working out here, so the brand will catch up.

    Do local entrepreneurs understand that Bain Capital Ventures is a venture firm and not a unit of Bain Capital?

    This market hasn’t been educated on a couple of things. First, that we exist. [Laughs.] Second, what is Bain Capital trying to accomplish? Sometimes it takes a conversation or two to let people know that we’re just like any other venture fund. We have carry and comp that’s just like other firms. We’re independent – our investment committee is just the nine of us. We have an overlap of limited partners with other Bain Capital funds, but some people incorrectly assume that we’re an evergreen fund with big Bain Capital as a solo LP. We’re like a lot of our peers, except that we happen to be part of a really big franchise.

    You’ve said the firm is very data driven. How is that impacting your investing style?

    There’s a value placed on being thorough and smart, which isn’t the case in all firms. They look at more metrics. Some [investors] are more intuitive and gunslinging. In the past I’ve relied on domain knowledge and intuition. So I think it’s been a very good education for me to be less intuitive and more thorough. When doing due diligence, I used to talk to a few customers. Now I talk to a dozen.

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  • Battery Ventures on CPG: It’s Simple, Great Product Wins

    mainimage_consumerpackagedgoodsLast week, I met up with Battery Ventures’ Brian O’Malley, who invests in a range of things but has been particularly successful leading some of the firm’s e-commerce investments. Among the related companies that O’Malley has championed at Battery are Skullcandy, the now public earphone maker; the fast-growing grooming products startup Dollar Shave Club; and high-end home furnishings company Serena & Lily.

    While e-commerce has been falling in and out of fashion on an almost yearly basis, O’Malley suggests that making smart retail bets, including on consumer packaged goods companies, isn’t that complicated. He starts with knowing what not to do, like focusing on the “things that are already done versus the things that are yet to come.” He elaborated during our sit-down. Our chat has been edited for length.

    You seem to be a big fan of consumer packaged goods companies. But they have a spotty track record. What’s the appeal?

    The good thing about CPG is high-frequency purchase rates. Take Dollar Shave Club. Guys shave every day, and once you get that staple, you [then sell] the toothpaste and hair gel and aftershave. There’s a whole list of products that you can add on afterwards. With CPG, you can very quickly get to hundreds of dollars of spend per customer.

    Is the trick to avoid low-margin businesses?

    Low margins are part of the challenge. CPG companies are also logistically complicated, they take a lot of money and time to scale, and there’s a big change [required] in behavior. So if I’m a Gillette customer, I might not like the idea of spending $20 for razor blades, but I don’t go to Google and type in “razor blades.” So companies typically have to spend a fair amount of money to gain visibility and change consumer thinking.

    Is there a model way to invest in these types of companies then?

    Well, if you need to raise big money to scale them over time — $25 million to $50 million rounds – you’re at the whim of what’s exciting to big money at that time. That’s the issue. So the types of things we’ve invested in on the consumer side have very quick payback periods on the unit economics. So you’re either paying back your advertising in three to four months because the advertising is cheap and the margins are good, or there’s more of this shared-risk model where you’re paying either a sales rep or an affiliate based on what’s actually sold. That way you’re always kind of marginally profitable.

    You make it sound so easy. Where do you think some of the bigger-known names, like Beachmint and ShoeDazzle and Fab, have gone wrong?

    Each one is different, but at the end of the day, the old adage that retail is detail is very true. It comes down to running a really tight ship. So you need to be very proficient at logistics, and with marketing and so forth. But when a lot of money was flowing at these companies, many of them became professional fundraisers as opposed to professional operators.

    People grew enamored with the idea of changing a business model or selling online, when at the end of the day, great product wins. If you have a great product, it doesn’t matter if you have a flashy business model. People will tell other people to come back and buy it.

    Does it matter what the product is?

    I don’t really care what the product is. I’ve got companies that sell everything from custom men’s shirts to baby bedding to wine devices. The question is: how big is the opportunity, what’s the pain point, how do you tell people about what you’re doing, and then what’s the buying behavior from there. Is it viral? Will users tell more people about it?

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  • Atomico Raises $476.6 Million for Third Fund

    logoAtomico, the U.K.-based venture firm that has expanded into numerous countries in recent years, has closed its third fund with $476.6 million, a new SEC filing shows. The firm began raising the capital in October 2012.

    Seven-year-old Atomico was founded by Skype co-founder Niklas Zennstrom to (mostly) seek out investments in non U.S.-based startups. Among its portfolio companies is the three-year-old, Berlin-based task management app developer 6Wunderkinder, which just closed on $30 million in new funding led by Sequoia Capital. (The deal marked Sequoia’s first investment in Germany.)

    In 2011, Atomico also participated in the $42 million Series A round of the 10-year-old Finnish game maker Rovio, of the Angry Birds franchise. It’s the only funding that Rovio has publicly disclosed to date.

    Atomico presumably saw a very nice return last month, when the Climate Corporation was acquired by Monsanto for roughly $1 billion. Climate Corporation helped its agribusiness customers predict crop yields using big data to examine soil quality, historical rainfall and more. Altogether, Climate Corporation had raised $109 million, and Atomico was there from the beginning, leading its $4.3 million angel round in 2007 with Index Ventures.

    Atomico has offices in São Paulo, Beijing and Istanbul, and  Tokyo. It closed its second, $165 million, fund in 2010.

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  • Brian O’Malley of Battery Ventures: “Investors Are Fundamentally Lazy”

    brian-omalley-bigYesterday afternoon, I sat down with Brian O’Malley of Battery Ventures in the gleaming marble lobby of San Francisco’s Four Seasons Hotel. 

    Despite having a cold, O’Malley – who has led Battery’s deals in a long line of solid companies, including Bazaarvoice, which helps e-commerce companies manage customer reviews; SkullCandy, which makes headphones and earbuds; and the hotel booking service HotelTonight — spoke animatedly on a wide variety of topics. We chatted at length about the consumer packaged goods space, for example. I’ll share that part of our interview next week. In the meantime, here’s a quick excerpt from our discussion of the ever-evolving dynamics of post-Series A investing.

    Money for anything past the Series A round seems to have tightened up this past summer. What are you seeing?

    It really depends on the company. The way the market is working today, growth-oriented investors are much more interested in getting into the right company in the right space, versus taking a risk on something that’s unknown. They’ll pay five times the price to get in the Series B of some hot company rather than do something that maybe has some question marks around it.

    Do you subscribe to the winner-take-all theory? Do you think there are only a small number of breakout companies worth chasing?

    Investors are fundamentally lazy, so a lot of the time, they aren’t going to figure [out a business’s potential] on their own unless they’re super savvy about a particular space.

    On the flip side, most VCs now recognize that the winner in any given space does get 90 percent of the economics, while the second-place company gets 8 percent, and everyone else [shares] 2 percent. So by Series B, people are already starting to see how the market is evolving; they’re already starting to see how repeatable your business is, and they’re spending much more time chasing the one or two dozen companies that everyone wants to get into.

    And you think that makes sense?

    I think it’s a function of larger funds needing bigger exits to make their math work.

    As the funds get larger, what you need from a success gets larger as well. For funds for which it’s incredibly easy to raise money, their limiting factor is their time. And companies take longer to exit [these days], and so [the VCs] have less capacity for new investments. And when you have less capacity, you need each of your investments to return more money. That’s one of the big challenges.

    What’s another?

    What’s interesting, and what has surprised me, is how much people are influenced in terms of which companies they think will break out based on which companies are having success today.

    There’s a lot of emphasis right now on these more enterprise-focused businesses, which has a lot to do with enterprise-focused businesses doing incredibly well on the public market. But the reality of my doing a Series B investment is that I’m not going to be selling for three to five years, and the market might be very different by then. Even still, people are willing to back much less mature companies in the space du jour rather than invest in something that has some scale in a space that’s out of favor.

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  • NEA’s Ravi Viswanathan on the Firm’s Concerns, Its Processes, and Its Next Big Fund

    RaviNew Enterprise Associates may be big, but it isn’t unwieldy. Not according to the picture painted by Ravi Viswanathan, who joined NEA nine years ago from Goldman Sachs to co-head the firm’s growth equity effort. I sat down with Viswanathan last week at the expansive Sand Hill Road offices of the 35-year-old firm, which has raised $13.3 billion over its history, including $2.6 million it raised for its 14th fund last year. (It’s one of the largest funds in venture capital history.)

    We chatted about where the firm has seen some of its biggest hits in recent years (think Workday, Tableau Software, Cvent); why it hasn’t made a single late-stage investment in 2013; and how the organization — which employs more than 100 people, including 12 general partners — decides on a deal. Our conversation has been edited for length.

    NEA does deals of all sizes out of a single global fund. What’s its investing range?

    We’ll do a $200,000 seed deal, [involving] two guys out of a Stanford class, all the way to a $50 million to $75 million check. We’ve written $100 million checks a couple of times – probably about 10 years ago, including for a semiconductor investment. But if I look at the last 10 growth deals, I’d say our sweet spot is in the neighborhood of $25 million to $50 million.

    You have offices in Silicon Valley, Washington, D.C., China and India. How much of your fund are you investing abroad?

    We invest up to 25 percent [abroad], though in the last five years, the number is less than 20 percent, because there’s been so much going on in the U.S. and, at the same time, there have been political and economic headwinds in China and India.

    How much consensus do you need to make an investment? Can you ever act autonomously?

    No, ultimately everything goes to the full partnership. Some of the smaller deals may occasionally get delegated [to a smaller group] but for growth deals, because it’s bigger checks, they always go up [to the general partnership for approval].

    How many votes do you need to get a deal done?

    You need a quorum; you need seven or eight partners to vote on it. But usually, if there’s more than one or two no’s, the deal almost never gets done. We don’t have a hard and fast blackball rule, but if there are serious reservations, we just [back off].

    As a firm, we have off-sites four times a year to spend time together, so the East Coast and West Coast knows each other really well; we’re very integrated. So if a partner calls me and says, “Here are three things that really bother me about the deal you presented,” it helps you arrive at the right decision. Of course, sometimes you have to say, “This is a great investment; we should go for it.” And we’re trusting enough of each other that if someone has that much conviction, [the others can be convinced to go along].

    You’ve made 24 growth investments in recent years, but none this year because of soaring valuations. Do valuations look more reasonable at the earlier financing stages? Do you have your pick of B stage companies to fund?

    Series B deals concern us. The quality deals — those that have the great syndicate, the great team — you have to pay up for them. On the flip side , people have paid up and been validated, because the Series C round has been that much higher. But broadly speaking, I think valuations are pretty rich here and in New York. In Chicago, meanwhile, we’re seeing full valuations, but they aren’t astronomical.

    Among the biggest venture capital firms, more seem to be adopting an agency type model. Would we see NEA embrace the same?

    We have a quasi-agency model. When we invest, rarely if ever do you get one person; you get two, three, or four people: A GP, an associate, a principal. And those folks spend a lot of time with the company. Do we have an army of biz dev people and marketing people and recruiters? No. We’ve thought about it; we know some firms are having great success with it. But we haven’t made any decisions. What’s important to us is making sure that we’re convincing [founders] with data that we’re adding value above and beyond our peers.

    You raised $2.6 billion last year. When will you be back in the market, and might NEA raise an ever bigger fund the next time around?

    We’ll be back in the market in 2015, plus or minus a couple of quarters. As for size, we go in with a pretty open mind, but [$2.5 billion] is the default. The question we have is: what’s the right thing for the companies and the LPs? We’ve spent a lot of years figuring out this model. But every fund is a new discussion.

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  • Former Sequoia Partner Mark Kvamme at Center of Controversy Again

    Kvamme,Mark-304Mark Kvamme, a former partner at Sequoia Capital, has cultivated numerous fans since moving to Ohio in early 2011. But he has also attracted critics who worry that his relationships with some of Ohio’s biggest power brokers are a little too cozy.

    In the latest controversy, press reports on Friday revealed that Drive Capital, Kvamme’s new, Columbus-based venture firm, received a $50 million commitment from Ohio State University several months ago despite concerns that the fund is unproven.

    As of early August, Drive Capital had raised $181 million for its debut fund, which is targeting $300 million. Kvamme’s sole partner in the endeavor is Chris Olsen, also formerly of Sequoia Capital.

    Kvamme did not respond to a request for comment over the weekend. Ohio State officials also did not respond to requests for information.

    Records released on Friday to the Associated Press and Cleveland’s Plain Dealer newspaper show that university officials were pushing back against the school’s investment in Drive Capital until April, over concerns that the firm’s Midwest investing thesis was based on “the attractiveness of what is perceived as an underserved market” rather than proof of concept.

    An email on April 5 from Ohio State’s chief investment officer, Jonathan Hook, to the school’s chief financial officer, Geoff Chatas, shows Hook told Kvamme directly that the school’s officials “did not see his fund as a good investment.” Later emails show that between April and July, when the investment was made, Kvamme and his wife, Megan, dined with then-president of Ohio State, Gordon Gee, during which time Kvamme seems to have secured a verbal commitment from Gee.

    “Your thoughtful questions, insightful comments, and sense of humor always give us food for thought accompanied by the delicious meal,” Kvamme wrote Gee in an email dated May 15. “We also always come away from our dinners with more ideas on how we can make Ohio the center of innovation and creativity.”

    In his email, Kvamme also asked Gee to approach other major universities for funding commitments, including the University of Michigan, Indiana University, and the University of Wisconsin.

    Gee replied to Kvamme that he would “see how we can best get other institutions to join with us.”

    Joseph Alutto, who succeeded Gee as the school’s interim president in July, had also questioned the size of the investment that Ohio State was planning to make in Drive Capital in the weeks before Alutto took his new office. Writing to Chatas in June, Alutto asked: “What is the justification for a $50 million investment rather than one in the $20-30 million range you had described as more typical? Let’s discuss.”

    Several weeks later, in an email to Chatas signed by “G,” the sender wrote that he had convinced Alutto to “honor the Kvamme agreement,” adding, “We are back on solid ground. Make that happen quickly.” (The name and email address of “G” were redacted by OSU when it submitted the emails to the media.)

    Venture capital is very much a relationship-driven business, of course. And surely, Kvamme looks as good a bet as any. Kvamme led Sequoia’s early investment in LinkedIn – a bet that has paid off handsomely for Sequoia’s LPs. Kvamme also borders on VC royalty. His father, Floyd, is a partner emeritus at Kleiner Perkins, and his ex-father-in-law is famed venture capitalist Pierre Lamond, long one of Sequoia Capital’s most powerful partners.

    Still, the investment appears to represent the largest commitment to a venture firm that Ohio State has made. Venture capital investments represented just 0.7 percent, or $21.7 million, of the $3.1 billion that the university was managing as of June 30.

    The agreement is also attracting scrutiny as Gee has reportedly been seeking an investment from Kvamme. According to the emails provided to news outlets on Friday, Gee, who remains at Ohio State in an emeritus position and as a law professor, talked about soliciting a $1.5 million contribution from Kvamme to help establish a higher-education policy center.

    An OSU spokeswoman told the Plain Dealer that it’s “important to note that exchanges about Mr. Kvamme as a possible donor took place well after the investment was made, and on the Center in particular, Gordon did not even know about the idea for such an institute at the time he started advocating for the investment opportunity.”

    Combined with school officials’ apparent change of heart, the “huge departure” for the university has critics like Brian Rothenberg, the executive director of the public interest group ProgressOhio in Columbus, concerned.

    “Mark Kvamme seems to have a very inquisitive mind and he doesn’t mind pushing the envelope, but it’s a toxic mix with public money,” says Rothenberg.

    Rothenberg has been focused on Kvamme’s activities for some time. In fact, ProgressOhio is challenging the constitutionality of JobsOhio, a private nonprofit that Ohio Governor John Kasich created with Kvamme’s help in January 2011. Gee joined the board six months later.

    The job, which brought Kvamme to Ohio from Silicon Valley, was expected to last just five months. But by August 2011, Kvamme had acquired an Ohio’s driver’s license, along with a farm outside Sunbury, Ohio. Apparently, he had also fallen in love. (Kvamme is now married to the daughter of Greg Browning, the former director of the Ohio Office of Budget and Management.)

    In 2011, Kvamme said he hoped to create 30,000 new Ohio jobs through JobsOhio. But from the outset, the program, which manages roughly $100 million per year, has operated under a shroud of secrecy. (The bill that created JobsOhio states that “records created or received by JobsOhio are not public records.”)

    ProgressOhio and others have characterized that lack of transparency as unconstitutional. The Supreme Court of Ohio will begin hearing oral arguments relating to the case this Wednesday.

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  • True Ventures on Spotting Winning Teams

    true-ventures_fullSince its 2005 founding, San Francisco-based True Ventures has been making seed-stage bets on startups, with an eye toward plugging up to $10 million into those that break out. 

    The firm’s strategy has worked with aplomb. True was the first investor in WordPress parent Automattic — one of the tech industry’s hottest private companies. True also wrote early, small checks to the video ad network Brightroll and the wearable device maker Fitbit, companies that have gone on to raise tens of millions of dollars from eager follow-on investors. I recently caught up with cofounder Jon Callaghan to discuss True’s model, how to know when a startup is souring, and what kinds of companies the firm is backing right now. Our conversation has been lightly edited for length.

    True typically gets 20 percent of a company in return for a fairly small first check of $1 million to $2 million. How do you do it?

    We’re investing a $200 million fund, so $1 million checks are half of one percent of the fund. If you think about that allocation, it lets us take on an incredible amount of risk. When things work, we have a large enough fund that we can support [the best investments] with $5 million or $10 million – and we do have $10 million in lots of companies. [With] our best companies, we’re the largest shareholder on the lowest cost basis because we were in there on day one.

    Some of your founders have enjoyed success before and could presumably sell 20 percent of their company for a bigger check. Why don’t they?

    We wouldn’t be doing them any favors by putting too much money in too soon. We’re actually much more aligned by saying, “Here’s $1 million to $2 million to take you through the next 18 to 24 months [to see if your idea works]. Is that worth 20 percent to you?” And it is. It’s a pretty good trade.

    When you write a bigger check, you also start bumping into loss aversion. You really don’t want to lose that first check. If you’re in too heavy in the beginning, it’s really scary for any investor. And the last thing that any creative founder needs is a nervous investor.

    True has now backed 120 companies. When do you know that you have a great team on your hands, and when do you know a startup is going south?

    We like to see a constant thread through [founders’] experiences, meaning that when we hear their story, it’s really clear why they’re doing a particular company. We backed [former Wired editor] Chris Anderson [who founded the unmanned aerial vehicle company 3D Robotics last year] knowing there were a number of threads that led him to his company: his fascination with innovation; his kids’ curiosity in hacking Legos with remote control airplanes; and finally, just knowing that there’s nothing else in the world he’d rather be doing – and this is someone who could be doing anything.

    When it comes to the downside, there are a lot of easy tells. Communication gets weird between a founder and the rest of the team. Things just don’t add up. When teams are in flow, you can see it and feel it. Their offices are alive with energy. Those are the good ones. If you spend time at a company and there’s not that energy, then you kind of have to say, “What’s going on here?” It’s usually because some basic stuff is missing. People aren’t on board the mission, or the founder or someone else took the product in a direction that isn’t really resonating with the rest of the team, or the team kind of didn’t have the trust required to get together in the beginning.

    True first went after consumer Web companies, then SaaS companies, then infrastructure companies. What does your newest crop of portfolio companies look like?

    We think this wave of software and mobile innovation will disrupt very large existing businesses. Hair color is one of two consumer packaged goods companies that we’ve done. In robotics, we’ve funded many interesting and wearable robotics companies that haven’t yet been announced. We now have one of the largest device and wearable portfolios that no one knows about. We also think the car industry, where there’s clearly a huge software opportunity, is really interesting.

    It’s a big, scary market, and traditionally you might say, “What? You want to sell to automakers?” But we think there’s a really brilliant team doing something very bold and audacious, and we can and want to take a ton of risk with that first check.

    (To read a previously published segment of our chat with Callaghan, on the “Series B Crunch,” click here.) 

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  • Venture Heavyweights Sit Back as Deal Sizes Soar

    Hanging Boxing GlovesIt’s been a banner week for a number of Internet companies.

    Last Wednesday, social network Pinterest acknowledged closing on a $225 million round that valued the company at $3.8 billion. Shortly thereafter, AllThingsD reported that Snapchat, the messaging app, is now weighing a $200 million investment round that would value the company at $3.5 billion. And just yesterday, NextDoor, a social network for neighbors, raised $60 million in fresh capital.

    But the reality is that some of today’s biggest venture heavyweights have pulled back dramatically on late-stage deals.

    Two weeks ago, during a visit to Andreessen Horowitz, Marc Andreessen told me his firm has “done almost no growth investments in the last year and a half.”

    Yesterday, Ravi Viswanathan, who co-heads New Enterprise Associates’ Technology Venture Growth Equity effort, told me much the same. “If you chart our growth equity investing over the last few years, it’s been very lumpy,” said Viswanathan. “Last year, I think we did four or five growth deals. This year, I don’t think we did any.”

    That’s saying something for a firm that is right now investing a $2.6 billion fund that it raised just a year ago.

    Andreessen attributes his firm’s reluctance to chase big deals to an influx of “hot money.” The partnership is “way behind on growth [as an allocation of our third fund],” Andreessen told me, “and that’s after being way ahead on growth in 2010 and 2011, because so many investors have come in crossed over into late stage and a lot of hedge funds have crossed over, which is traditionally a sign of hot times, hot money.” He added, “What we’re trying to do is be patient. We have plenty of firepower. We’re just going to let the hot money do the high valuation things while it’s in the market. We’ll effectively sell into that.”

    That’s not to say later-stage deals don’t have their champions right now. At this week’s TechCrunch Disrupt conference, venture capitalist Bill Gurley of Benchmark told the outlet that “a global reality is that some of these companies have systems, they have networks in them, that cause early leads to always play out with really huge platforms.” People “laugh or write silly articles about the notion of a pre-revenue company having a very high valuation,” added Gurley.  But “if you talk to some of the smartest investors on Wall Street, or go talk to guys like Lee Fixel or Scott Shleifer at Tiger, they’re looking for these types of things. They’re looking for things that can become really, really big.”

    Still, Viswanathan’s concerns sound very similar to Andreessen’s when I ask him why NEA has pulled back so markedly from later stage investments.

    “It’s an amazing tech IPO market, and that drives growth,” Viswanathan observed. “But I’d say the growth deals we saw last year [were] elite companies getting high valuations. There are still great opportunities out there. But right now, it feels like there are high valuations even for the lesser-quality companies.”

    Photo courtesy of Corbis.

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  • True Ventures’ Jon Callaghan on the Series B Crunch

    JDCHeadshot1Late last week, I visited Jon Callaghan, a cofounder of eight-year-old True Ventures, a firm that makes seed-stage investments in companies that it can afford to back for the long haul. The firm’s string of hits includes the book recommendation site Goodreads, which raised $2.75 million and sold to Amazon this year for $150 million; 3D printing company Makerbot Industries, which raised $10 million and sold to Stratasys this year for $403 million in stock; and Automattic, the still-private parent company of WordPress. At True’s San Francisco offices, surrounded by a sea of glass windows and polished wood floors, Callaghan shared his views on a number of things, from the firm’s operations to the democratization of startup capital. We’ll feature more of that interview in StrictlyVC this week; what follows is a part of our discussion that centered on the growing shortage of Series B funding for startups.

    Years ago, you told me that True only does its own follow-on rounds, meaning in companies it has already backed. Has the firm reconsidered that stance, given that fewer and fewer firms are focused on Series B size investments? You’re investing a $200 million fund. Meanwhile, it seems like an underserved market.

    It’s a really interesting part of the market. We’re not building a new product for that market. It’s not in front of us right now, though I personally think about how we can solve the needs of great entrepreneurs, and that’s a big, huge problem in the ecosystem right now.

    What’s creating this bottleneck, in your view? 

    There are definitely too many seed-funded companies. But I think it goes back to risk. I don’t think the normal venture capital model is designed to take extremely large product/market risks. What that means is when companies get through the A [round] to the B and they still have big unanswered questions around product/market, it’s really hard for the normal industry to fund that.

    What would you do that’s not being done?

    You make sure that [the size of] your investments are relative to your [overall] fund [size] and you embrace the idea of investment failure as part of the model.

    Other VCs will accuse you of being patronizing. They’ll say that failure and risk are very much part of their models. What are you suggesting that’s different?

    Well, we’re talking about a big gap in the market – B rounds – and the reason those rounds aren’t getting funded is [the startups don’t have] enough traction.

    For the most part, the industry has gravitated toward strong, traction proof points because that’s a good business. Put $5 million or $20 million into a business that’s working and write it up? That’s a fantastic business. But it’s different than taking high risks on B rounds. So to your point, I think there’s a product to be built that’s structured around taking high risk in B rounds.

    If True Ventures were to do it, what would it look like?

    I think there’s probably a $3 million to $5 million B round product to be built that’s sort of in the $15 million to $20 million pre [valuation] range, and in order to do that you’d need a fund large enough to have follow-on capital for each of those. You can run the math. Thirty to 40 companies [in the portfolio] would be pretty optimal.

    I think it’s a really interesting slice of the industry, and it’s not rational for Sand Hill Road to come down and do it because [those investors already] have a really good model. There are some funds out there that are really well-equipped to do this and do a phenomenal job, including Foundry Group and Spark Capital — they embrace really big product and market risks. But [most] VCs will fund B and C rounds for things that have product/market fit and traction.

    Those are good companies, too. But there are an awful lot of companies that get through A rounds that don’t have all of those things and shouldn’t die or go away.

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