• Jeremy Liew on Snapchat, Anonymous Apps, and the Fallibility of Intuition

    17666532621_d1d0dc8be6_zLast week, we published several interviews from our most recent StrictlyVC event in San Francisco. Today we’re running the last of those interviews, with venture capitalist Jeremy Liew.

    Liew joined Lightspeed Venture Partners in 2006 from AOL, where he’d worked in corporate development, and as many readers will know, his star has risen quickly in the last nine years, thanks to investments like Snapchat, Bonobos, and The Honest Company. (Snapchat is reportedly valued at upwards of $20 billion and Liew wrote its first check, for $500,000. Meanwhile, both Bonobos and The Honest Company are expected to go public in the not-too-distant future.)

    Liew — who primarily focuses on social media, commerce, gaming and financial services — doesn’t seem to be taking anything for granted. Parts of our chat, edited for length, follow.

    What’s your day like? Are there certain things you pore over every morning like App Annie?

    Probably three-ish years ago, taking more of a quantitative approach and looking at data sources was a more of an advantage; you could spot things before other people did. I still think that it’s good to see what everybody’s seeing, and we want to do that, but oftentimes, there’s an awful lot of interesting stuff that’s not as well-known, and you have to go looking for that. Bitcoin is a good example. Now there’s a lot of coverage about it, but two or three years ago, that wasn’t the case, and you could meet every interesting Bitcoin company in the world, which then was 15 or 20 companies.

    So you develop a thematic approach, then dig in?

    First, just being able to observe the present without judgment [is important]. It’s easy to rush to judgment based on your intuition, but you have to recognize that your intuition can be pretty fallible before you write something off.

    You also have to have a point of view that’s differentiated. Some people did around [virtual reality]; we didn’t. we missed that whole thing. But when you pick a sector early, you really can be as well-versed in that sector as anybody else.

    You think you’ve already missed the virtual-reality wave? 

    There are some sectors, where you really have to spend time to develop a point of view. I haven’t [when it comes to VR] not because I don’t think it’s interesting but because I’ve been focused on other stuff. And I think VC is becoming more of a specialist business. If you don’t know enough about a category, entrepreneurs probably figure that out pretty quickly.

    You’ve said that you think L.A. is more in touch with what the rest of the country wants than Silicon Valley. How much time do you spend there?

    I have one board seat in the Bay Area, five in L.A and five in New York. It’s not that I don’t want to invest in the Bay Area, but [I no longer believe there’s a] path that starts [here] with the digerati and that spreads to everyone else as they slowly grow to understand what we’ve always known. Instead, it’s actually young women who are the carriers of cultural viruses; it’s young women who are early adopters who will evangelize technologies and help spread them. And you ask yourself: who understands what young women in middle America will be doing, people in Silicon Valley or people in L.A. and New York?

    One of your biggest L.A.-based bets is on Snapchat. For those who don’t know, how did that deal come together?

    It was in 2012. It’s a lucky thing. One of my partners has a daughter who, at the time, was in high school. He’s an engaged dad and he noticed she was using this new app all the time, and [asked about it]. She said everybody in school has three apps: Instagram, Angry Birds, and Snapchat. (Remember, it was 2012, so people were still playing Angry Birds.)

    He mentioned it to me since I focus on consumer stuff, so I downloaded the app, and I really didn’t understand what the big deal was [but figured if a] subset of people are using something intensively, it’s worth understanding why. So I saw [an email address] on Snapchat’s site and I emailed it and never heard back. I [turned to] LinkedIn and no one was listed as an employee at Snapchat. [Eventually] I turned to a WhoIs [domain] lookup [and it listed] Evan Spiegel, who was a sophomore at Stanford, so I emailed him through LinkedIn and never heard back. Then I started randomly emailing [different possible gmail addresses for him] and didn’t hear back. I was about to give up but tried one last thing. Since Evan was a Stanford student and I was a Stanford grad from business school, we were in the same Facebook [group], so I direct messaged him. And I heard back from him one second later, and he said, “Oh, I’d love to talk with you.” [Laughs.]

    He wandered over the next day, cracked open his Mixpanel [mobile analytics] account and I was shocked by the engagement, retention and growth . . . It was growing so fast that he said, “We can’t pay our server bills,” and we said, “We can help you with that!”

    Reports say Snapchat is now worth $10 billion to $20 billion. What do you think it’s worth right now?

    I agree that’s what reports say. [Laughs.]

    Have you taken some of your money off the table?

    We haven’t. Venture is a game of extremes. You aren’t successful because you have a high hit rate; you’re successful because of your best deals. So you have to ride out your winners. If Evan and the team think there’s opportunity here, then we do, too.

    You’ve also backed the anonymous app Whisper, whose most direct competitor, Secret, just went out of business, while another, Yik Yak, seems to chugging along. Has your view on anonymous apps evolved in any way?

    With Whisper or Yik Yak, you actually get very different things. Yik Yak is very geographically focused. Whisper is much more about topic. You can connect with and emphasize with others about being gay in high school, or around loving your kids but sometimes just needing to be by yourself a little bit. Whatever it is, you’re not sure who you talk with about some of that stuff, and this gives you a forum to do that.

    That’s the upside of anonymity. The downside is bullying or just mean-spiritedness. One of the few tools you have with these social sites is the culture within the community. If you go to an app where everybody else is ragging on other people, then it’s you think it’s okay to do that. If you go to an app where everyone is empathetic and supportive, then you say, okay, that’s kind of what we do here. Think of Pinterest, which essentially started as a photo sharing site. Users could have posted [lewd] pictures but they didn’t because they could see no one else did. You’d have to be a real jackass to think [behaving badly] is a cool thing to do when other people aren’t doing that, and most people aren’t real jackasses.

    What did you make of Secret’s end? People seemed upset that the founders had taken $6 million off the table in the Series B, but no one was holding a gun to investors’ heads when they struck that deal with them.

    I think in every transaction, a willing buyer meets a willing seller, and they agree on terms. The outcome there was probably what nobody was planning for but that happens in entrepreneurship and startups.

    When is the right time for founder liquidity?

    There’s no universal answer. Sometimes, investors want to own more than they’re able to. That’s probably not a great reason, but that’s actually one key reason, and it’s what I suspect happened in Secret’s case. Other times, it’s about alignment. Maybe you have founders who were in college two years ago and there’s an opportunity for the company to sell for $100 million. It must be pretty tempting to have a life-changing moment, and having the founders aligned with investors in wanting to go for a bigger opportunity is a good reason for founders to take money off the table. In any event, it’s a rare thing. It shouldn’t be a standard thing.

    Connie

    , , , , , ,

  • Pantera Capital’s Dan Morehead on the Future of Bitcoin

    17639963136_8b2c64b746_mAt a StrictlyVC event in San Francisco last week, Dan Morehead, founder of the San Francisco-based hedge fund Pantera Capital, sat down with seed investor and venture advisor Semil Shah to talk Bitcoin.

    Morehead knows Bitcoin as well as anyone. After logging time at Deutsche Bank and Goldman Sachs, then joining Tiger Management, where he rose to the head of global macro trading, Morehead founded Pantera, a 12-year-old outfit that has more recently committed to investing exclusively in Bitcoin and other digital currencies. We wanted to know why — as did Shah — so Shah asked him. Parts of their discussion follow, edited for length.

    SS: There was exuberance over Bitcoin, then not, and now it’s coming back. What’s going on?

    DM: Every technology goes through a hype cycle, where there’s a kernel of truth or a kernel of genius, and once the media catches it, it [captures everyone’s imagination] for a while. Then there’s an awkward period. And Bitcoin went through that. [But] it was more extreme because it has one unique feature. It’s a technology protocol that has a real time price feed. And that’s really, really weird.

    In 2011, no one really cared. By 2013, everyone had [that price feed] on their screens and the press was talking about it, and it led to extreme bubbles [including in Bitcoin mining]. At the end of 2013, the price of Bitcoin was 93 times higher than it was the year before. Bitcoin improves all the time, but it wasn’t 93 times better, so a bubble . . . had to deflate.

    SS: Was it rational for Bitcoin’s price volatilty to affect venture investment in the technology?

    DM: I think people did get over their skis in 2013, thinking it was going to change the world overnight. It’s going to change the world, but it’s going to take a couple decades to do it, as other Internet protocols [have taken].

    One data point about Bitcoin: All the companies in the Bitcoin ecosystem are worth just over $3 billion today. All the Bitcoin that exist are about worth that right now. So you have a ratio of about 1:1. Meanwhile, in talking about the U.S. equity market or the developed company space, the market cap of all the companies in the U.S. is worth five times the value of money supply. So I think you’re going to see a persistent trend of value venture in Bitcoin increasing at a faster pace than the underlying currency or protocol.

    SS: Numerous traditional VCs have made bets on seed- and early-stage Bitcoin companies, but it seems like these bets will take longer [than expected] to play out. Will they have to continue supporting these companies, or will other investors come down the stack?

    DM: It’s certainly taking longer than some people expected a few years ago. But you’re seeing [an influx] of investors. Last month, Circle [Internet Financial] did a round with Goldman Sachs, which was the first major international bank to invest. So not only are you getting the traditional venture investors, but you’re getting strategic investors like big banks and big exchanges trying to get invested in the Bitcoin space.

    SS: You understand Wall Street. How does it perceive Bitcoin, both as a currency and as a technology platform?

    DM: I think most of Wall Street realizes that the systems that move money are incredibly antiquated and incredibly inefficient. Most of them were designed in the 1950s. The main thing for wiring money – SWIFT – is basically sending messages and it’s very primitive and can be disrupted by Bitcoin very easily, and most banks would like to see that happen.

    SS: How would that affect big banks’ fees and the way they make money?

    DM: I think too much was made in the early days of [Bitcoin’s ability] to disrupt banks. A lot of banks now have retail stores – selling services to people. So they can still retain their relationship with the customer and then swap out the back end.

    Also, there are a small number of banks that do cross-border money movement; they’re called correspondent banks, and there’s really only a dozen or so that control an entire market. An extreme example is Africa, where, if you want to move money into or out of the entire continent, there are only two banks that will do it and other banks need to use those two banks and it’s very expensive. So banks want a cheaper way to get money in and out of places like that.

    SS: What is happening in Bitcoin in the rest of the world outside the West, especially where rule of law is weak?

    DM: In mobile money, Kenya is actually the world leader. Southern Africa has weak institutions and currencies that deflate at a rapid rate; Zimbabwe is the world record holder with a 100 trillion dollar note now. So their citizens need a better solution to transact.

    They also are unbanked [along with billions] of other people on earth that don’t have access to a bank but do have a cellphone, and going straight to some mobile money solution — bitcoin is a great solution for that. Already, 75 percent of adults in Kenya use a mobile system called M-Pesa. In fact, 45 percent of the entire GDP of the country is processed in M-Pesa. To me, that’s the future of bitcoin.

    (If you’d like to hear more from this discussion, you can listen to it in its entirety here.)

    Connie

    , ,
    , ,

  • The Venture Math Behind All These Giant Financings

    MathTo better understand unicorn valuations, the law firm Fenwick & West recently analyzed the financing terms of 37 U.S.-based venture backed companies that raised money at valuations of $1 billion or more in the 12-month period ending March 31.

    Among the firm’s findings about these financings is that only a quarter were led by “traditional” VCs and the rest were led by mutual funds, hedge funds, sovereign wealth funds and corporate investors. The investors also received significant downside protection in case the companies’ value declines. Not last — and not surprisingly — many of these later-stage investors are looking at far less upside than the companies’ earlier investors, which may create issues for some down the road regarding if and when to sell to an acquirer, as well as when to go public.

    We talked earlier this week with Barry Kramer, a partner at Fenwick and the author of the firm’s new report, to learn more about the numbers. What follows is a bit of that chat, edited for length.

    Were you at all surprised that a full 75 percent of the money that poured into these so-called unicorns came from nontraditional investors?

    That’s what I expected. These are the mutual groups and hedge funds that used to invest in IPOs, but IPOs are getting delayed so much that these companies now have the same [risk profile] at the late-stage [as newly public companies].

    Also, VCs don’t typically invest at these really high valuations.

    Yet traditional VCs, including many early-stage investors, are keeping their board seats at these privately held companies. Did your research touch on the impact of those seats not necessarily turning over? A public offering usually results in some fresh blood on the board.

    That’s an interesting point that we didn’t examine, though I think two things could be happening. Because IPOs are being delayed and VCs are serving on these boards longer, it might be impacting their ability to [spend more time] with more junior companies. The other thing I see is that because these [earlier-stage VCs] have, say, 10 to 15 percent of the company, they’re very engaged and attentive because of that economic interest, whereas with public companies, that’s [not always the case].

    In your report, you say that roughly 22 percent of the unicorn companies you studied have dual-class common stock structures — which provide founders and management and, in some cases, other shareholders with super voting rights. Was there any type of pattern? For example, were the companies with dual stock structures more often founded by serial entrepreneurs with track records of success?

    We’re definitely seeing this much more than 10 years ago, though it’s really all over the map. If you’re two kids out of school without a track record and you get your first venture round, people might look at you funny if you want a dual track structure. You can still do it later, once you have some leverage [because your company is performing well], but it’s often a negotiation. Other times, yes, people are more understanding of founders who have a track record if they ask to [implement a dual stock structure] at an early stage because the founders have proven they know how to run a company.

    Your report talks at length about how much downside protection investors are getting in these deals, though you say they have more protections in an acquisition scenario than with an IPO. Can you explain?

    In many of these cases, company valuations could fall 80 percent in value, and investors would still get their money back [because of their liquidation preferences]. The typical company will have, let’s say, a $10 billion valuation. And lets say that early-stage investors put in $200 million and later-stage investors invested $800 million [for a total of $1 billion invested]. If the company’s value falls to $2 billion [the price an acquirer is willing to offer for it], all those investors will [be repaid]. But let’s say the company goes public, and you’re a later-stage investor who has acquired preferred shares at $30 per share. If it goes out at $25 a share, you’ll have lost $5 a share.

    Of course, companies that go public are typically doing well, so these later-stage investors are investing with the idea that even if they lose a bit at the IPO, the stock will pop up over time.

    That’s their only protection?

    There are other types of IPO protections. In one common type, the investor puts in a provision that says: If you go public at less than $30, you give me more stock, so I’m effectively paying the [IPO] price. In another scenario, the investor insists that the company can’t go public at less than the price it paid for its shares unless the company gets the investor’s approval first. So there are mechanisms, but [there are less of them appearing in these deals].

    For Kramer’s full report, which is very much worth reading, click here.

    Connie

    ,
    , ,

  • Bill Maris Addresses Sensational Headlines at Disrupt

    Bill Maris at DisruptBill Maris of Google Ventures gave a thoughtful performance yesterday at the TechCrunch Disrupt conference in New York. Interviewed by the outlet’s co-editor, Alexia Tsotsis, the two covered a range of high-profile stories that have been published in the last year and relate either to Google Ventures’s portfolio companies or to controversial – even seemingly strange — statements that Maris has made to reporters.

    Earlier this year, for example, in a Bloomberg profile, Maris was quoted as saying: “If you ask me today, is it possible to live to be 500? The answer is yes.”

    The Bloomberg piece actually provides readers with a fairly rich picture of what Maris is trying to achieve at Google Ventures. But Maris’s very specific prediction has stuck to him like chewed gum and Tsotsis gave him the chance to address it yesterday — an opportunity he seized, suggesting the “science fiction headline” belies the truth.

    The reality, he said is that “for generations, physicians and researchers have worked really hard to diagnose, treat and prevent disease. And so I’m interested in the people that are doing that. And if that adds five years to people’s lifespans, if it adds 10 years . . . I think it’s a worthy pursuit.”

    At the beginning of the last century, he noted, the lifespan in the U.S. “was about 40 years; now it’s about 77.”  There’s “a ton of work that has to be done” to address the question of whether humans can live 500 years, Maris continued. But he said he thinks things are moving in the right direction. “I think it’s possible within a generation or two, at the most, to cure cancer.” Maris also noted that the “first human genome was sequenced in 2004. It took about 15 years and $2.7 billion, and now you can sequence a genome on a machine that can sit [on a small side table] for under $1,000 in a couple of hours.”

    Maris was also asked about the reputation of Uber — heralded as Google Ventures’s largest deal ever when Google backed it in 2013 —  as “ethically challenged.” Calling Uber the “fastest-growing company we’ve ever seen,” he offered that any outfit growing so fast is invariably going to “bump into challenges.” Maris also shared some color about one of his first meetings with Uber CEO Travis Kalanick about a potential tie-up.

    “When we invested in the first round of Uber, my partner, David Krane, and I went to see Travis and talk about the round,” said Maris. “I told Travis the same thing I told Matt Rogers and Tony Fadell when we invested in Nest [Labs] . . . which was: ‘What does it take to take it off the table? We don’t want to get into an auction. We’re not looking to save money on valuation, and hopefully you’re not looking to crank it as much as possible.’ And Travis said, ‘Here’s what it’s going to take. Here’s the price and what I want the round to look like. Are you on board with that?’”

    After Maris said Google Ventures was, and they “shook on it,” that’s “exactly the deal that we did, and Travis was as good as his word,” said Maris, offering that Kalanick could “easily” have asked for “15 to 20 percent more.”

    Tsotsis next moved on to Google Glass — which Maris says is alive and well, despite reports suggesting otherwise. We’d hoped she might ask Maris about another, Uber-related headline this year: the news that Google plans to develop its own Uber competitor.

    As you may recall, Bloomberg had reported back in February that Google was “preparing to offer its own ride-hailing service, most likely in conjunction with its long-in-development driverless car project.” At the time, Bloomberg said that David Drummond, Google’s chief legal officer and senior vice president of corporate development (as well as an Uber board member), had “informed Uber’s board of this possibility, according to a person close to the Uber board.” Bloomberg further reported that “Uber executives have seen screenshots of what appears to be a Google ride-sharing app that is currently being used by Google employees.”

    Shortly after the piece was published, a “person familiar with the matter” told the Wall Street Journal that the “news that Google is developing an app to rival Uber has been blown out of proportion.” Reported the Journal: “The person said a Google engineer has been testing an internal app that helps Google employees carpool to work, and the app isn’t associated with the company’s driverless cars program.”

    That seemed to settle the matter. Given the size of the opportunity Uber is chasing — and Google’s slowing growth — we’re not certain why.

    (By the way, in case you’re curious: Unlike Maris’s colleague Ray Kurzweil – who reportedly takes 150 supplements each day to extend his life — Maris doesn’t take any, he said yesterday.)

    Connie

    ,
    , , , , ,

  • Fred Destin of Accel Partners on What’s Changing (Fast) in Europe

    ©2013 Jon Chomitz Photography 3 Prescott street, Somerville, MA 02143 www.chomitz.com jon@chomitz.com 617.625.6789

    Almost exactly a year ago, Belgian-born venture capitalist Fred Destin left his longtime post with Atlas Venture in Boston and joined Accel Partners in London. Last week, over a charcuterie board at a French cafe in San Francisco, Destin talked with StrictlyVC about the move, what the Accel team in London shares in common with their U.S. peers (and what they don’t), and the newest trend in European startup funding. Some of that chat, edited for length, follows.

    Accel London has been around since 2000 and closed a $475 million fund in 2013. 

    Yes, and started investing it in April of last year. The fund was raised with maybe a little bit of anticipation. Also, sometimes you meet no entrepreneurs you want to back, then you meet five at the same time, so our pace is always a little inconsistent.

    How big is the team?

    We have six seven partners, one VP, one principal, three associates. We have a habit of promoting from within. I’m a rare external hire.

    How closely tied are you to the team here in the U.S.?

    We run separate funds, but it’s the same brand and we have a fair amount of overlap [in terms of LPs], and I believe we have 18 coinvestments that come in a variety of flavors. Both funds had been looking at SaaS accounting for small businesses, and in the end, [New Zealand-based] Xero is the only company you want to back in this field – we think it can kill Intuit – so we [collectively] made a $100 million investment in the company. We’ve also co-invested in [the newly public online marketplace] Etsy and [the Australia-based collaboration software company] Atlassian. Sometimes, it’s European-born companies, too. When we backed World Remit, a remittance business, half of its $40 million Series A came from the U.S. and the other half came from London.

    What if you wanted more than 50 percent? Do you ever compete with the U.S. team? 

    I can’t really think of a case where we’ve  been competitive. They’re a really disciplined team on investments, and so are we. If we find something that we think is really great, we’ll say, hey, we can syndicate with Index [Ventures] or we can try to move all the money through the Accel partnership. [The U.S. firm] looks at [the deals] independently. But there are definite benefits [to partnering], as when we find a little gem like Showroomprive [a Paris-based online shopping giant that sells discounted clothes, cosmetics and household items]. It was bootstrapped and had got to quite a large size, and [my London colleague] Harry [Nelis] went to meet them and said, “We can write a single check. I’ll bring Palo Alto into it so you have one investor and one board member.” So we put in [roughly $47 million] in a single shot, with both funds contributing.

    Can you see a future where you won’t be Accel London but something else? DFJ and Benchmark obviously decided to reign in their brands at different points.

    You learn from what happens in the past. I’m not sure you can scale venture very well. Having general partners in London who effectively decide on what happens to the firm makes decision-making really simple.

    We’re also in close cooperation with Palo Alto to make sure we represent the brand in the same way.

    How institutionalized are your communications?

    The important decisions, like when to hold an annual LP meeting or when to fundraise, are discussed extensively between the groups, but the rest of our discussions are very organic and multithreaded. You don’t want to fight the natural order of things. We’re very careful about not sharing too much information about the companies we look at, but we definitely share expertise and views and kind of help each other be better.

    It helps when you have funds that are performing well and teams that are high quality. If one part of the organization was doing well and the other wasn’t, it might become more tense, but that’s not the case.

    There’ve been lots of reports out this year about Europe falling behind.

    I’m just back in Europe, and I’m amazed by the number of large successes being built. There were seven or eight billion-dollar-plus exits last year, including [the British property site] Zoopla [which went public last June] and [the online restaurant delivery company] JustEat [which went public in April 2014]. Our third fund has three [billion-dollar-plus] companies, including [streaming music service] Spotify, and guys like [ridesharing company] BlaBlaCar, World Remit, and [the online lending marketplace] Funding Circle are growing super fast.

    I used to be quite negative about the market,  but now we’re seeing companies achieving hyperscale and building value really quickly, and in the case of [our portfolio company, the online marketplace and Craigslist competitor] Wallapop, it’s even bringing the fight to the local guys [in the U.S.].

    But European entrepreneurs are often quick to note that their funding options remains fairly limited.

    The VC landscape remains quite weak. You have Index and Accel as the sort of leaders. You have Balderton [Capital], which has enjoyed a great reinvention-slash-turnaround [since parting ways with Benchmark]. Then you have some new managers, including Mosaic [Ventures] and Frederic Court [a longtime investor at Advent Venture Partners who is raising a new fund under the brand Felix Capital], and a bunch of micros VCs like Hoxton [Ventures]. But there are a bunch of funds that have exited or stopped fundraising — names that everybody knows aren’t going to make it.

    What’s happening, though, is that U.S firms and the “Tiger Cubs” are smelling blood, so we’re seeing Insight [Venture Partners], DST [Global], TCV, and some of these tech hedge funds all suddenly coming into Europe on a regular basis, and anything that scales they want to fund. It’s a huge factor right now. They’re hunting aggressively, writing big checks, and moving fast.

    And that’s purely good news? As you know, there’s a little angst here about the impact all their money is having on companies and their burn rates.

    In general, we love it because we finally have scaling capital. We just invested in Deliveroo, which is the European version of DoorDash. It’s growing like a weed, but a few years ago, we’d have had to scale organically or raise a small Series B. Now people are knocking at the door of companies that are scaling and saying: “Can we write a big check?” We’re like, finally, we’ll be able to build billion-dollar companies in less than 10 years – maybe in three to five years.

    The other big factor in Europe is Rocket Internet, which used to clone companies but they had no balance sheet. Since its IPO [last October], they have a balance sheet. And while I don’t know exactly how much cash they have, it’s probably a billion-plus [dollars] that they can use to invest, replicate and whatever else they do, and they’re the biggest VC in Europe. They force people to raise their game, because if you want to compete against Rocket, you have to know what they’re doing.

    Connie

    , ,
    , , , , , , ,

  • TPG Growth’s Bill McGlashan: We’re No Stranger to Startups

    Bill McGlashanBill McGlashan would like you to know something. TPG Growth is no newcomer to startups. The 45-person group that McGlashan leads within 22-year-old TPG Capital hasn’t just been writing checks to startups since 1999, but it has incubated a number of companies, too (including, last year, the film studio STX Entertainment). “I think there’s been a lot of noise lately about PE getting into growth investments, which is a function of absolute check sizes getting so large . . .. but [investing in privately held companies] is part of what we do and have done for a very long time. This isn’t private equity now doing growth. This is what we’ve always done.”

    We talked Wednesday with McGlashan about how TPG Growth works, why the typically private firm is talking with the press suddenly, and how it plans to invest the giant, $3 billion fund it announced earlier this week. Our chat has been edited for length.

    How old is TPG Growth, how many funds has it raised, and how does it differentiate itself from the broader company?

    We raised a $500 million venture fund in 1999. It was one of the largest-ever first time funds and the team went happily off to do VC, which seemed like a good idea in 1999. In 2000, which is when the fund actually closed, things were obviously challenging from a macro perspective. So I came aboard in 2003 to rethink the strategy. With the second half of that fund, we took a different approach [that was more integrated with the rest of the firm], and we’ve maintained it through three subsequent growth funds.

    [Ed: Those are a $1.2 billion fund, which McGlashan says has “about a 25 percent” gross IRR and “19 percent net IRR”; a second, $2 billion fund that he says has a 60 percent gross IRR and net IRR of 40 percent, and the firm’s newest, $3 billion fund.]

    What’s your overarching approach? 

    We want to do investments where our $67 billion platform can be a uniquely compelling partner in delivering growth, and that can mean different things depending on the industry and stage of the business and the nature of the company . . . so we’re agnostic about sectors and geographies. The problem with consumer funds or geography-specific funds is that everything a hammer sees is a nail, and we couldn’t do what we do if we had hammer/nail syndrome.

    How many companies a year do you fund, and who works in your group? Can you describe the hierarchy for us?

    We [typically fund] 10 or 15 companies a year where we can [accelerate the business]… There are nine partners in the group and each [focuses on] a combination of sector and geography. We also have a range of senior advisors that can be deeply involved. Then we have principals, VPs, associates, [as well as access to a] whole, 90-person operating team [at TPG], whose head of human capital [Fred Paulenich] was [senior VP of HR] at Walmart and Levi Strauss [previously].

    So when we go into a company like [famed guitar maker] Fender [in which TPG Growth took a majority stake in early 2013], we’re fixing the core business, including improving the sales organization, but we’re also embarking on a digital strategy, thinking of e-learning and collaboration, and focusing on direct-to-consumer engagement. Even though it’s a $700 million revenue business, it doesn’t have leadership that could go on this journey alone, so we can plug in people who can accelerate that change, and we do the same with all our companies.

    Who makes the ultimate decisions on these investments?

    There about about 30 partners across TPG and 8 managing partners [and from that group] there’s an investment committee [that includes members of TPG Growth]. We don’t have several wizards who are pushing a red or green button. [Firm cofounders David] Bonderman and [James] Coulter and other senior partners are [involved in all the] decisions. It’s important because if you’re an entrepreneur and we’re investing $50 million, we want you to know the firm cares as much about your company as it does with a $1 billion investment.

    How long does it take for a yes or no?

    We don’t make bets, write a check and hope it all works out. We’re signing up for being held accountable as a partner who will deliver value, and that takes real time. There are [some deals] when we move quickly and get deals done in a month. Sometimes, we spend six months getting to know each other. Time isn’t usually the gating issue. We do real work. It can’t happen with a tummy rub.

    You have investments all over the map. Do you have any idea where in the world you’ll be committing this new capital?

    [Our first growth fund] was 60 percent developed world, 40 percent emerging market. Our last fund was more like 80/20. Rough justice, [our new fund will be] 70/30, but we’re careful not to settle on allocation targets. We’re truly global, with investments in Brazil, Indonesia, Africa, Turkey, China; we have a tower company in Myanmar that’s growing like a weed.

    Some of those places are obviously frothier than others. China, for example, seems dangerous from this distance.

    We’ve not invested in China in the last three years because we felt valuations were very challenging with all these R&D funds and local funds and angels and super angels. We just felt that valuations, married to the fundamental risks in that market, didn’t make sense. But we did just approve our first deal recently; we’ve found that there’s been a valuation reset in certain sectors.

    What about private company valuations here in the U.S.? Plenty of people have grown concerned about those, too, particularly given how few companies are going public.

    Overall, what entrepreneurs have been able to do is trade an IPO for private financing, and that offers real advantages to building these businesses. I don’t think that’s going away, by the way. I think that public-private confluence we’re seeing is probably here to stay.

    As for valuations, some of these are great companies, like [our portfolio companies] Airbnb, Uber, Domo, and SurveyMonkey, which we recently exited. There are others – you can imagine that we’ve seen them all – that we’ve passed on.

    You sold your stake in SurveyMonkey? Are you doing much secondary selling? Have you sold any of your shares in Uber or Airbnb?

    It’s a deal-by-deal, case-by-case basis. Honestly, with SurveyMonkey, it wasn’t a case of the company not doing well. It was their strategy to do a series of refinancings and there was tremendous interest because the company is so [fast-growing] and fundamentally profitable that they can generate strong, ongoing yield for new investors. We weren’t looking for a 25 percent annual return.

    We have not sold Airbnb or Uber. The fundamental growth in those businesses is incredible.

    Connie

    ,
    , , , , , ,

  • A Startup Exposes the Shadiness of Shipping

    Shipping IndustryAmong a sea of specialized data companies, Windward, a five-year-old, 35-person, Tel Aviv-based company, stands out. The reason: it’s among few companies attempting to collect and sell detailed, real-time information about global ship activity.

    Its story attracted Horizon Ventures of Hong Kong to its door. (Horizon just led a $10.8 million strategic investment in the company, with participation from Windward’s early backer, Aleph). Windward also counts a dozen governments around the world as customers. After poring over some of Windward’s findings about ship behavior, we also found ourselves wanting to learn more.

    Luckily, we were able to catch Windward’s cofounder and CEO, Ami Daniel, as he bounded around New York City yesterday, trying to strike new partnerships. Our chat, edited for length, follows.

    You were a navy officer for six years before starting Windward. Did you start thinking about the company during that period?

    I was entrepreneurial as a teenager, and when I left the Navy, I hooked up with [Windward cofounder] Mantan [Peled], who I’d served with for five or six years. We wanted to do something big, and we felt that oceans were the Wild West. More than 90 percent of the world’s trade is carried by sea [according to the International Maritime Organization, or IMO], yet the shipping ecosystem is much more opaque than most people realize.

    How so?

    Talk to a big commodity trader, for example – someone who buys and sells more than $100 million in oil every year. His secret sauce is his connections, like port agents who know who is entering or leaving the ports, or the mine manager who knows when cargo is rolling out to market, or the contact in Nigeria who knows how to buy [low and sell high]. It’s an industry that’s based on 200-year-old methods. It’s all very gray. It’s kind of like real-estate in New York. [Laughs.]

    You claim Windward has a better picture than anyone of everything that’s happening. How does your tech work? 

    We start by checking whether you are who you say you are and creating a record of what you’ve been doing. We also calculate what you say you’re transporting by gauging, for example, how long you’re in the jetty, and how long it’s taking you to load what you’re carrying compared with the average loading rate for the same cargo. We don’t necessarily trust you to tell us how much oil you’re carrying. There’s a lot of [subterfuge in shipping]. For example, ships only report their final destination 41 percent of the time, and 55 percent of ships misrepresent their port of call for most of their voyage.

    Aren’t there mandates against doing such things?

    The IMO is responsible for maritime data and there are mandates issued by the UN, which is the regulator. But there is no punishment for not complying. You can steal an identity. You can turn off your data transmissions. I personally approached the head of the IMO to give him an executive summary of our findings and to ask for the organization’s feedback and they never called us back.

    And you collect all this information how? Through satellites? Sensors? 

    It starts with public information, then we get commercially available information. Spire, for example, is a San Francisco-based company that tracks ship transmissions and weather and sells information to companies like us. Beyond our data partnerships, we go to port agents and logistics brokers and we say, “We’ll give you technology [in exchange for information].”

    Everyone has a small segment of the picture. There are no magic solutions, no one vendor, no one protocol. Everybody’s stories are different, so it’s very time- and resource-intensive work. But one of the moats we’re building is one of the biggest databases ever.

    But you have competitors. 

    We do have competitors, including IHS [a company that sells information and analytics about the maritime industry to customers]. But what we’re doing is better. Others take this older approach of information services, with analysts looking at databases and writing reports and then selling a giant report to everybody. We’re taking a data science approach, using Hadoop and Apache Spark to compute and slice and dice things automatically according to different queries.

    You have a dozen governments paying you to subscribe to this platform. Can you give us some idea of what they’re paying you?

    We’re happy that we’re being paid for the value that we’re providing, which is high, but I can’t be more specific except to say that we’re seen three times revenue growth year over year for the last three years and we’re making enough that we’ve barely touched the [$5 million Series A round we closed in 2013 from Aleph].

    Like another intelligence specialist, Palantir Technologies, Windward started with government customers but wants to begin targeting financial clients. Have you lined up any firms so far?

    We’re in beta testing. No one is paying yet. But we’re not cash strapped. We can afford to engage with customers as we develop the product. We want to make a billion dollar company out of this  That’s why I’m in New York, meeting with hedge funds and commodity traders. Legwork!

    Connie

    ,

  • A Far-From-Comprehensive List of Women Who Venture Firms Should Be Pursuing

    Emily WhiteIn recent weeks, StrictlyVC has received several requests from readers asking what women we’d propose that venture firms hire. The timing isn’t surprising. Ellen Pao’s gender discrimination lawsuit against Kleiner Perkins dominated the headlines throughout March and triggered anew discussions about the gender imbalance in the venture community. Then there was Fortune’s sit-down with Marc Andreessen, in which he said his venture firm – whose general partners are exclusively male — has repeatedly tried, and failed, to hire the same female executive as a GP.

    VCs are asking recruiters for help, too, says Joe Riggione, a cofounder of the executive recruiting firm True Capital, who tells us that even before the Pao trial got underway, “we’d begun getting investor searches where they asked us to prioritize female candidates.”

    Riggione sees a particularly “big opportunity on the operator side,” because so many women have the engineering, product and marketing experience that would make them attractive venture candidates, particularly for investor roles where they can be groomed into general partners.

    We don’t think it’s all that hard to come up with potential general partners, either. Let’s face it: Any top female executive would have the same odds of developing a great track record as a male executive pulled into a venture firm. In fact, in little more than an hour this weekend, we came up with a short list of 16 women that firms would be smart to pursue if they’re truly interested in diversity (and they should be, for the obvious reason that more diverse teams are more effective teams). Here’s what we came up with, in alphabetical order. Note: we have not talked to these women about this list or gauged their interest in VC.

    Sukhinder Singh Cassidy. Cassidy is the founder and CEO of the e-commerce video platform company Joyus. We’ve no idea how it’s doing, though it has raised $41 million, including a $22 million round led by Marker last November. (It also just settled a lawsuit against it by a company claiming it infringed on its patents.) We’d probably hire Cassidy no matter its fate. Before Joyus, she served (briefly) as the CEO of Polyvore, spent a year as an entrepreneur-in-residence at Accel Partners, and before that, logged five-and-a-half years as president of Asia Pacific and Latin America operations at Google. Cassidy was also a senior VP of business development at the now publicly traded company Yodlee, which she helped form with numerous colleagues from Amazon, where, yes, she also once worked, as a business development manager. (And her resume goes on. In fact, this reporter wrote a piece for BusinessWeek about Cassidy’s impressive track record back in 2001.)

    Caterina Fake. A Vassar grad, Fake cofounded Flickr and Hunch, both of which were acquired for nice sums (by Yahoo and eBay, respectively). Fake is also a seasoned investor who is a partner of Founder Collective and has made numerous seed-stage investments, including in the online marketplace Etsy, where she wound up serving as board chair for five years. Fake is currently running her newest company, four-year-old Findery, and likely wants to see it through to some natural exit. It could be worth starting to woo her from now, though.

    Shana Fisher. Fisher may not be interested in working for anyone but herself, which is currently the case, but it’d be worth making the effort to see. Fisher currently runs her own New York-based, early-stage firm, High Line Venture Partners, but earlier in her career, she was an SVP of strategic planning at IAC; served as a VP and director of media and technology mergers and acquisitions at Allen & Company; and, oh, yeah, was a program manager at Microsoft before that. Did we mention that she was also one of the first investors in Pinterest?

    Kimber Lockhart: Lockhart was recently appointed chief technology officer at One Medical Group, a very well-funded primary care practice, which she’d joined in April of last year as its VP of engineering. Given that plum assignment, she might be hard to wrest from the company, but if we were hiring, we’d give it a shot. Before joining One Medical, the Stanford grad was a senior director of web application engineering at the storage company Box, which she joined in 2009 after it acquired her two-year-old collaborative document editing startup Increo Solutions.

    Marissa Mayer. Life doesn’t seem so rosy for Mayer as the CEO of Yahoo, though she undoubtedly knew what she was walking into when she accepted the job in July 2012. (After all, life hasn’t been too rosy for any of Yahoo’s many recent CEOs.) Whether Mayer would leave without being ousted remains a question, but one senses she’d probably be a good investor (maybe even better than CEO). Certainly, she’s been building on her investing skills, collecting a wide range of startup stakes that include the automated investment service Wealthfront and the wireless power startup UBeam.

    Mary Meeker. Kleiner Perkins spent a dozen years trying to recruit Merrill Lynch’s longtime star investment analyst. It finally succeeded in late 2010, and Meeker, who helps lead the firm’s digital growth funds, sounded happy enough to be there during the very public trial last month of former junior partner Ellen Pao, where Meeker testified that Kleiner is the “best place to be a woman in the business.” Still, all things considered, we wouldn’t be shocked if Meeker decided on a change of scenery given the right circumstances.

    Michelle Peluso. Peluso is the CEO of the discounted luxury e-tailer Gilt.com, as well as a board member. It’s hard to know how the company is doing. It planned to go public in the third quarter of last year, then the fourth quarter, and instead wound up raising $50 million earlier this year. (The company has raised $286 million since it was founded in 2007.) Still, Peluso, who assumed the role of CEO in February 2013 from cofounder Kevin Ryan, has been widely credited with helping to revive the company’s fortunes. She’s also held some other major-league roles – – including as a top honcho at Citibank for four years and as the longtime CEO of Travelocity – that would make her a very big catch for any venture firm, particularly one focused on later-stage investments.

    Deborah Quazzo. Quazzo is the founder and managing partner of GSV Advisors, a six-year-old, Chicago-based broker dealer that provides advisory services to the education and business services sectors, as well as invests in related startups. Quazzo, who also co-founded the investment bank ThinkEquity Partners, was recently taken to task by the Chicago Sun-Times, which criticized her role as a member of the Chicago school board. It noted that during Quazzo’s tenure (which is ongoing), the district has tripled its spending on education-technology companies she has invested in. In response, Quazzo, who said she didn’t appreciate becoming the outlet’s “punching bag,” has promised to donate any profit she sees from those investments.

    Sheryl Sandberg. We don’t need to explain why it would be the coup of all time for any firm to hire Facebook’s longtime COO except to say that, in addition to having such an impressive career (Google, Treasury Department), she seems — from this distance, anyway — imminently likable. We’d guess this is the person Andreessen Horowitz has pursued, by the way, though it’s just a hunch based on Marc Andreessen’s penchant for working with his close colleagues. (The firm didn’t respond to our request for more information about the female GP it has tried to hire. But as many readers will know, Andreessen joined the board of Facebook in 2008. Sandberg, who was invited onto Facebook’s board in 2012, joined the company in 2008.)

    Gwynne Shotwell. Shotwell is the longtime president of SpaceX, which she joined in 2002 as its VP of business development. With a master’s and undergraduate degree in mechanical engineering and applied math from Northwestern University and the very apparent endorsement of Elon Musk, we figure if she can help him run his spaceship company, she can probably figure out venture capital, too. (She’d presumably add a lot in particular to firms like DFJ and Founders Fund and Lux Capital that more aggressively think “outside the box.”)

    Kara Swisher. This may be the most controversial of our picks, mostly because it’s very hard to imagine Swisher abandoning journalism. Still, we think Swisher would be a huge get for a top venture firm. A former Wall Street Journal columnist turned co-executive editor of the highly successful All Things Digital franchise, Swisher isn’t just great at landing scoops and synthesizing information but she’s an entrepreneur now, too, having given her old employer the finger in late 2013 and more recently forming the media property, Recode, with her longtime partner, Walt Mossberg. Swisher isn’t a technologist. But you can imagine the flow of opportunities that would find their way to her based on her extensive network.

    Tiffany To. To has spent the last three years as VP of product management and marketing at Coho Data, a company whose storage appliances help enterprises scale-out storage. Before that, she was a group product manager at VMWare. (She has also held product and marketing jobs at Intel and SGI.) To, who graduated from Stanford with a computer systems engineering degree, also has an MBA from UC Berkeley’s Haas School. (Just remarking.)

    Trae Vassallo. Vassallo, a strategic partner at Kleiner Perkins Caufield & Byers, might be turned off from venture capital, given what sounds like an uneven experience at Kleiner. To wit, she led the company’s investment in Dropcam and reportedly played an instrumental role in its investment in Nest Labs but was eventually cut in a broad downsizing. (She also testified recently that she once had to fend off a former colleague who showed up in her hotel doorframe in his bathrobe.) A firm would be smart to try changing her mind, if so.

    Emily White. White’s career has taken off over the last eight years, beginning with a job at Google as a director of its Asia Pacific Latin America online sales and operations. In 2010, she jumped to Facebook, ultimately becoming the director of mobile partnerships at its subsidiary, Instagram. White’s name was in the news more recently because of another role – as COO of Snapchat, a job she left in March after just 15 months. We don’t know if she’s interested in venture capital right now. According to Recode, White has “long wanted to become CEO of a company herself.” Given how highly she’s regarded by entrepreneurs, though, we’d certainly give her a call if we were running a top venture firm.

    Susan Wojcicki. Wojcicki probably has more money than most venture firms, even the big ones. She’d also be very hard to pry from Google, where she spent nearly 14 years as its SVP of Adwords and Adsense and where she has spent the last year-plus running its enormous YouTube subsidiary. Still, who would have thought LinkedIn cofounder Reid Hoffman would join Greylock Partners? Sometimes, you just never know.

    Julie Zhou. She headed to Facebook nine years ago after getting her undergraduate and master’s degrees in computer science at Stanford and has been managing design and research teams across numerous products ever since. Zhou has also demonstrated a knack for sharing what she has learned about design and management issues. (See here.) We’re guessing she’d bring plenty to the table.

    Photo (above) of Emily White, via Instagram.

    Connie

    ,

  • Big-League LP: “It’s a Good Time to Be Asking Questions”

    Peter DeniousRoughly one year ago, FLAG Capital Management, the limited partnership, revealed that after 20 years, Diana Frazier would step down from her role as co-head of U.S. venture capital, and that Peter Denious, who formerly headed the firm’s emerging markets efforts, would assume her role.

    Denious has been fairly quiet since then, possibly because the move came about as FLAG – which has backed Accel Partners, Andreessen Horowitz, Redpoint Ventures, Spark Capital and Union Square Ventures, among others — was beginning to raise its ninth fund of funds.

    Denious still declines to discuss that effort, but he did talk with us this week about his observations – and concerns – about the current state of the venture industry. Here’s part of that conversation, edited for length.

    You recently created a presentation called “Venture Portfolio Management in the Age of the Unicorn,” stating that FLAG has exposure to 56 so-called unicorns across 100 positions but suggesting that you have concerns about whether investors are taking enough money out of those deals. Are you talking with them about it?

    We talk with them pretty openly and actively about it. We’ve always been big believers that you have to be both a great investor who can attract world-class entrepreneurs, as well as be a world-class portfolio manager.

    It’s easy for VCs operating inside partnerships to get involved in their 10 or so investments, but it’s important for somebody to be thinking about the dynamics of generating returns, too. It’s a piece that we think is relevant in a time when things are up and to the right.

    Given the number of secondary shops to descend on Silicon Valley in the last couple of years, I’d guess that plenty of firms are selling portions of their stakes. What are you seeing?

    These are case by case situations. Obviously, we’ve looked into our portfolio and across those exposures, and where the VC has an embedded return of at least 10x, we’ve been seeing them take chips off the table. We think as long as managers are having the discussion, they’ll arrive at the right answer.

    Are you concerned by how few companies are going public, relative to the number of richly funded late-stage companies we’re seeing?

    I don’t think that each of whatever the number of agreed-upon unicorns that we’re seeing will do well. Some will be severely tested when the capital runs dry, and anyone who says otherwise must be wearing a pretty strong pair of rose-colored glasses.

    By the same token, the amount of transformation and disruption in these companies’ respective industries is truly amazing. I do think there’s a subset of these companies that deserve to be very big. Do they deserve to be $50 billion, $100 billion [in value]? That’s subject to debate, but many will be very profitable if they aren’t already.

    So you’re more troubled by valuations than underlying business models.

    In most cases, we don’t have a business model problem. We don’t see a lot of nonsense, as with the last [late ‘90s] cycle. What’s debatable is valuation and are people paying too much for growth as these businesses scale, and I think that’s all to be determined. Who are we to say that this company at that valuation is too low or too high?

    We’re typically early-stage and not growth or late-stage investors and part of the reason we don’t invest there is because as you move later and later on the continuum, you’re taking more of the valuation risk. I don’t think anyone would question the 10 most highly valued unicorns. The question is whether the premiums being paid for their growth is justified, and again, only time will tell. I do think that late-stage and crossover ventures are the most at risk, but that’s what they get paid to do.

    But you anticipate a day of reckoning?

    With respect to the pool of these late-stage companies, one can argue that so much late-stage capital has allowed for more unicorns to be created than would otherwise be the case. When that capital goes away, you’ll see more exits at the sub-$1 billion level.

    Some [may go public.] I think it’s too early to draw too many conclusions about IPOs, which were down in the first quarter; we’ll know more in the next few quarters. But it’s a good time to be asking questions. I do think there will be a day of reckoning.

    Connie

    ,
    , , , , , ,

  • First Data Waves Its Flag in Silicon Valley

    first-data-logoSoon after Frank Bisignano joined the payment processing giant First Data as CEO two years ago, Bisignano — who was formerly co-chief operating officer of JPMorgan Chase — set his sights on beefing up the company’s corporate venture firm. Among his first steps: appointing Pete Donat, a longtime VP at First Data (and a VP at both Visa and MasterCard before that), to lead a four-person team that now assesses startups and alerts different unit heads within the 23,000-person company to technologies that might benefit them.

    “Frank really wanted to put extra emphasis on innovation in Silicon Valley,” says Donat, “so we hired a team out here, and we’ve been increasingly active over the last year.”

    “Active” is somewhat subjective. The team saw 300 companies last year and invested in six – not exactly the blistering pace one might expect from the company, which has been owned by KKR since 2007.

    Then again, First Data — which has struggled to find new areas of growth in recent years — is in the middle of a turnaround that involved a $3.5 billion private placement in the company last year, including more capital from KKR.

    Some of the capital freed by that investment is now streaming into startups that the company hopes will help it develop more products. Among them is Booker, a four-year-old, New York-based online booking platform that helps small businesses sell their services online. “It’s a really cool company with lots of great potential and synergies that fit with First Data and our merchant clients,” says Donat. (First Data participated in Booker’s $35 million Series C round last month.)

    That private placement should also help First Data when it comes to acquisitions, which are clearly of interest to the company. Over the last two-and-a-half years, First Data has acquired three startups: the cloud-based payment software developer Clover Network; Perka, a digital rewards-program designer; and the mobile-gift-card company Gyft. It also created Insightics, a business unit it developed with the analytics company Palantir Technologies to glean more insights into customer spending from its merchant customers’ credit-card records.

    As for startups looking to get on First Data’s radar, approaching as a partner seems to be the best course. Donat says his team finds most of its investment opportunities from people who “knock on our door and say, ‘I need one of your capabilities.’” When the team does “go outbound,” he continues, “we go out with a short shopping list and the likelihood of a us doing a deal goes up.”

    Asked if his group might adjust its pace to invest more actively, Donat says 2015 might see “slightly” more deals from the group, but that he doesn’t expect things to “change dramatically. Once we [back] a deal, we want to ensure that we’re supporting that company. We probably overinvest in the amount of time we spend, helping [founders use First Data] to grow their revenue.”

    Either way, Donat notes, First Data is “very committed” to its venture arm and “very committed to growing its presence in the Bay Area.”

    Indeed, he says that when he opened First Data’s office in Palo Alto in early 2013, there were three people in the office. Today, he says, between Gyft, Clover, Insightics, and a separate digital commerce unit, the office is home to more than 100 employees.

    Connie

    ,
    , , , ,

    • StrictlyVC on Twitter