• Hummer Winblad Reboots

    Screen Shot 2015-04-06 at 9.25.39 AMLike many venture firms founded before the last tech boom, the San Francisco-based outfit Hummer Winblad Venture Partners seemed, for a time, to be staring death in the face owing to the market’s implosion, uneven returns, and a drawn-out lawsuit with two major record labels over its 2000 investment in the now defunct file-swapping service Napster.

    The 26-year-old firm made it through the to the other side, though, and today, it’s in seemingly good shape, newly rebranding itself as HWVP and, this morning, launching a snazzy new site to mark the occasion.

    The changes are more than cosmetic. HWVP is, like other firms of its vintage, a lot smaller than it used to be. The firm once employed a deep bench of managing directors and associates. Now it employs three managing directors: Mitchell Kertzman, a serial CEO (Liberate Technologies, Sybase, Powersoft Corp.) who joined the firm 12 years ago; Lars Leckie, who joined the firm a decade ago and was promoted to managing director in 2011; and Steven Kishi, who has spent the last 20 years bouncing between Hummer Winblad and various operating roles. (Most recently, Kishi was VP of product management at the cloud services company Altiscale.)

    Even firm cofounders John Hummer and Ann Winblad are no longer “managing directors” but are listed at the new site instead as “founding partners.”

    The amount of capital that HWVP has to invest is far less, too. The firm closed its sixth fund with $201 million in late 2007, down from the $424 million it had raised for its fifth fund in 2000.

    Leckie suggests the firm will look to close its next fund with between $105 million and $150 million. (Leckie declines to discuss HWVP’s specific fundraising plans, but he offers that he believes that “small, focused funds do the best by their investors,” saying he thinks that “$35 million to $50 million” per partner is ideal.)

    The firm’s prospects would seem pretty promising. Though forced to retrench, HWVP has never veered from its core thesis of investing in enterprise software companies. And while it missed the consumer wave as a result, its bets look pretty prescient right now. For example, the firm was the first investor in the 11-year-old, SaaS-based sales platform InsideSales, which last month raised $60 million at a valuation north of $1 billion. (The company has raised $200 million altogether.)

    That bet alone will “return our [sixth] fund,” says Leckie, who says that HWVP owns “two times what everyone else owns” of the company.

    HWVP is also among the earliest investors in Five9, MuleSoft, and Birst, among others. Five9, a San Ramon, Ca.-based call center company, went public last year. (Its market cap is $272 million, as of this writing.) MuleSoft, the San Francisco-based integration platform for connecting enterprise applications in the cloud, has raised well over $100 million from investors, closing its last round of $50 million last year at a post-money valuation of $800 million. Meanwhile, Birst, a San Francisco-based business intelligence and analytics business, just raised $65 million in Series F funding last month, bringing its total funding to $156 million. (Leckie declined to discuss its valuation.)

    Of course, mark-ups are one thing. Actual exits are another. It remains to be seen whether HWVP will see the profits it’s expecting, particularly given the widening gap between the number of richly valued late-stage, still-private companies and those going public.

    Perhaps unsurprisingly, Leckie is highly optimistic about the firm’s odds. “We’re having a kick ass first quarter,” he tells StrictlyVC. “Valuations will fall where they fall. But it is a very good time to be quietly investing in enterprise and SaaS infrastructure.”

    Luckily for HWVP, it’s been doing it for years.

    Connie

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  • Pushbullet, Beloved by Users, Shoots for Fresh Funding

    Ryan OldenburgPushbullet, a San Francisco-based, six-person software startup whose free app makes it easy for users move notifications, links, and files between devices, is announcing $1.5 million in seed funding from General Catalyst Partners, SV Angel, Alexis Ohanian, Garry Tan, Paul Buchheit, and other angel investors.

    It’s in the market again, too. As is often the case with today’s startups, Pushbullet is announcing a round that came together some time ago – 10 months ago in this case – as a way to kind of raise its flag. Says founder Ryan Oldenburg, a former Android developer at Hipmunk who formed Pushbullet with several former Hipmunk colleagues: “We don’t need a giant round to power a sales force – just a standard Series A. Everyone here has two jobs and I’d like to start making that not be the case anymore.”

    VCs could certainly do worse. Since launching in 2013, Pushbullet says it has distributed “tens of millions” of notifications and transferred hundreds of thousands of links, files, and text snippets across users’ various devices, garnering rave reviews from CNet, Wired, and LifeHacker in the process. Just this morning, GigaOm described it as “one of those rare apps where, once you start using it, you’ll likely begin wondering how you lived without it for so long.”

    Now, it’s a matter of raising user awareness, preferably before Apple and Google find other ways to better tie together their operating systems across devices. (With Pushbullet ranked far below the most downloaded productivity apps, according to both App Annie and Android Rank, the race is on.)

    We talked with Oldenburg about the company last week.

    What compelled you to start Pushbullet?

    It started about a year-and-a-half ago. I had a smart phone, but as a programmer, I spent a lot of time working on computers, which traditionally didn’t work with smart phones, nor did anyone think they should. As a result, people were doing odd things, like emailing themselves to get their files on their phone. A world where people have both smart phones and tablets is great, but nobody had been acknowledging the opportunity to make it much better.

    How did you know you’d struck on something?

    It was just a side project, but it had an unexpectedly awesome reception. The first 15,000 [users] signed up within a couple of weeks without any PR. I just submitted it to Reddit and it struck a nerve.

    You then headed to Y Combinator. What did the program do for you?

    Y Combinator has a way of making you feel not good enough and like you have to work 10 times harder – which isn’t a bad thing. If you’re the right person [to lead a startup], it makes you want to do what it takes to grow beyond tens of thousands of users to tens of millions. It got us to think much bigger.

    How much bigger? Will we see an enterprise version of Pushbullet?

    At this point, we’re focused on building it for consumers. But as we get later stage, this [technology] is definitely something that will fit into enterprises and [where we’ll probably get the most financial support]. Dropbox [straddles] both worlds, too, and that model works for us.

    Connie

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  • Distelli Skips the Seed Round to Land a Powerful Board Member

    Rahul SinghIn recent years, there’s been no shortage of chatter about seed funding, from the alleged benefits of seed rounds to their ballooning size. (Clinkle, anyone?)

    Distelli, a two-year-old infrastructure automation company that simplifies code deployment and server management for developers, decided to skip past it all to raise $2.8 million in Series A funding led by Andreessen Horowitz, a round that sees general partner Scott Weiss joining Distelli’s board.

    The decision makes sense given the broader context. Distelli was founded by Rahul Singh, the fourth engineer on the Amazon Web Services team. He spent nine years building the platform services and infrastructure that powers the cloud computing platform, and he’s accustomed to finding ways to move things forward as quickly as possible.

    In fact, Singh — who says Amazon’s developers push out new code every 11 seconds – not only credits Amazon’s growth with its own “move fast” culture, but he says Amazon inspired him to make it easy for any developer to iterate just as quickly. Toward that end, Distelli enables engineers to communicate with every server in their environment to learn what’s running on each of them, as well as update their code or roll it back, and track every change in the process.

    It isn’t a brand-new concept. Distelli, which is based in Seattle and employs six people (including two other former Amazon engineers), is going up against a number of competitors. Among them are Chef, a company that allows its users to automate how they build, deploy, and manage their infrastructure, and Puppet Labs, which also develops IT automation software. Both have raised many tens of millions of dollars in venture capital, too.

    Singh argues that Distelli has a much bigger vision than other startups and that Distelli’s biggest competition at the moment are the many software teams still building their own infrastructure automation systems internally.

    Still, says Singh, it was important to have someone like Weiss – who cofounded the email security company IronPort Systems back in 2001 – in Distelli’s camp as soon as possible.

    Indeed, skipping over seed funding had “little to do with equity and valuation,” he explains. “The real significance of doing an A round was that angel rounds often don’t include board seats and I want a great partner to execute because the opportunity is so huge.”

    As for the size of the round, which is modest by recent standards, Singh observes that “just as raising too little can be a problem, raising too much can be a problem, too. I wanted to ensure we raised enough money to reach our next set of goals and to achieve what we want in the next 18 months — without getting complacent.”

    Connie

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  • Weathergage: Peers Thought We Were “Half Crazy” to Back Micro VC

    judith elseaJudith Elsea, a cofounder of the Palo Alto, Ca.-based venture fund-of-funds Weathergage Capital, has been a proponent of micro-VC funds since long before the term came into fashion.

    We caught up last week to talk shop, during which time Elsea was fairly candid — except about whether eight-year-old Weathergage has sealed up a third, $200 million fund that the firm set out to raise 10 months ago. (Weathergage closed its first, $250 million vehicle, in 2007. It closed a second fund with $182 million in 2011.)

    Weathergage invests in growth equity funds and venture capital, including micro VCs. On a percentage basis, much do you allocate to the last?

    Micro VC is part of a larger practice. I couldn’t share how big a part, but we’re one of the pioneering investors in micro VC and we’ve increased our exposure over time. We saw that it was much easier and cheaper to start a company and that you could do a heck of a lot more at the product-market fit level with a lot less money. We saw the opportunity, but we didn’t know if we’d see investors set up much smaller size funds to capture entrepreneurs at that point in their companies’ development. But it happened that we did and we were fortunate to invest in some really talented investors.

    I remember when Mike Maples — who you’ve backed — was starting out in 2006 with $15 million from 10 individual investors.

    Many institutional investors and our peers in our general ecosystem thought we were half crazy for allocating some our capital to this area. But as time has gone on and returns have rolled in and been quite good and competitive, it’s attracted more investor interest and become a lot less of an oddity.

    Still, no one knows yet quite how they’ll do.

    The primarily characteristic of the performance so far is a large number of M&A and early exits. So you might say that’s an artifact of the current market. But that doesn’t mean they haven’t achieved exits fairly quickly and at fairly attractive multiples in aggregate.

    I don’t know how much time it takes to prove a model – probably longer than we’ve seen in micro VC. But for the best-in-class managers, they seem to have found a nice niche in the VC ecosystem. We certainly see their companies getting sponsored by the best venture funds with great regularity. We see them getting attractive exits. To the extent that the funds aren’t fully liquidated yet, you could say they’re unproven. But you could say the same of any VC firm in last five years.

    Some LPs prefer new managers who have operating experience. Others prefer investing experience. Does Weathergage favor one or the other?

    Some [of our top managers] have recent operating experience that resonates with entrepreneurs who matter. Some, because of the body of their investment work, resonate with the entrepreneurs who matter. So we don’t have a bias in that regard.

    Do you care how much of the fund GPs contribute from their own pockets?

    We’re looking for GPs to be committed in every way to the success of their endeavor. Sometimes that takes the form of capital commitment; in all cases, it’s the time and attention that they spend on their companies’ behalf. Especially in micro VC, where people have probably had some success in their previous lives but are raising very small funds, we don’t have a tendency to be dogmatic [about how much they kick in themselves].

    As more funds compete for the attention of LPs, they’ve become increasingly specialized. Is that an effective strategy? Do you invest thematically?

    We do, but we don’t express it by sectors. We have views on life sciences, for instance, so because we’ve been quite bullish on that area, we have sought out exposure to best-in-class life sciences managers. But we haven’t really gotten down to the level of saying, We need more Internet-focused managers. The investment opportunity is too dynamic.

    Connie

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  • The Industry Gets a New, $50 Million Micro-VC Fund of Funds

    Seed-Planting-SeedToday, Venture Investment Associates, a 21-year-old fund of funds group that commits capital to venture capital, growth capital, and private equity groups, is announcing that it has closed on an oversubscribed $50 million seed fund of funds that counts some pretty tony institutions as LPs. Managing director Chris Douvos — who joined the firm in 2011, having worked previously for TIFF (The Investment Fund for Foundations) and Princeton University’s endowment — won’t let StrictlyVC name those investors. But we talked recently about numerous other facets of the new fund, and who it’s liable to back. Our chat has been edited for length.

    This is your second formal micro-VC fund of funds, and half of it is already committed. Is that right?

    Yes, we’ve been investing in [micro-VC] since 2004; we were part of First Round Capital’s friends-and-family round. But we closed on an oversubscribed $25 million fund of funds in 2012, 80 percent of which went to four managers: True Ventures, First Round Capital, Data Collective and [O’Reilly AlphaTech Ventures]. And half of this oversubscribed $50 million fund is deployed among First Round, True, and Data Collective. We’re also likely to do OATV again when it comes back in the market.

    That’s concentrated.

    I believe investing is about conviction. I would give [First Round founder] Josh Kopelman the last dollar in my kids’ college funds.

    What kind of ownership percentage do you target?

    When we’re a major institutional backer of a new entity, we like at least 10 percent of the fund. In the case of OATV, back in 2006, we did 15 percent of the fund. At Data Collective, we [bought] 10 percent of fund in 2012. We have a group of [institutional] investors who are super sophisticated and we’re sort of bird-dogging ideas for them.

    What new idea are you spying? What other types of funds are you looking to back right now?

    We’re looking to find another group or two where we can really make an impact and put them in business. Having invested in the space for more than a decade now, it’s easy to tell who the tourists are and who the long-term players are. I focus on groups that somehow punch above their weight, that offer a platform dynamic where their companies will materially benefit from interaction with the VC but where the VC doesn’t end up being a bottleneck.

    I’m not looking for sharpshooters that are the next really smart ex-entrepreneur, because I’ve seen that model rise and fall several times. There are a plethora of these people raising funds; I think we’ll have a Cambrian explosion and the species will kind of die off during the next financial crash. It’ll be like a meteor hitting.

    Are you seeing many newer firms emerge with platform approaches? I take it you’re looking for another True or First Round – firms that do a lot to facilitate interactions between the founders of their portfolio companies.

    Firms that demonstrate platform dynamics are really special, but they’re few and far between. There’s no one on my radar screen right now.

    Do you care where a firm is based? Would you fund a firm that’s not in the U.S.?

    This is an information business, and when you’re investing far afield, you start outrunning your supply lines of information. You’re investing in people and you need to understand their motivations and their fears and their contexts, and it’s hard to know those when they’re thousands of miles away.

    Do you favor VCs who spin out on their own to entrepreneurs?

    I think operating experience is overrated and that people undervalue the investing experience of people who’ve written checks of institutional size. When I’m looking at an entrepreneur, I’m asking myself: How do they think about investing as a fiduciary, because it’s a very different skill set and thought process.

    There’s a bias in the Valley that [investing experience] is a secondary consideration and that finding a cool technology or exciting team will make everything work out. But we’re starting to see with late-stage deals that are heavily structured and sapping the returns of earlier investors that [those ties] aren’t sufficient to the end goal of making money for investors.

    What do you make of AngelList? Do you think more entrepreneurs should or will begin using it to form their own micro VC outfits?

    I think AngelList Syndicates and [the accredited investor platform] FundersClub could really reshuffle the landscape. We don’t know yet how those stories play out. We made a small investment in AngelList’s Maiden Lane [a fund that backs investors on AngelList] partially to have a front row seat as things unfold.

    But part of me wonders about a lot of people who are raising these small funds. Traditional fund structure is deeply flawed. The average fund lasts twice as long as the average American marriage. It often outlasts their LP’s tenure at an institution. They’ve got to be thinking: Why not raise money via AngelList instead?

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

    Connie

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  • Gil Penchina is Coming for You

    Gil+Penchina+TechCrunch+Disrupt+SF+2014+Day+L4UGljNri2BlGil Penchina is a former eBay and Wikia executive. He’s also a longtime angel investor who has enjoyed cash-on-cash returns of 6x over the last 15 years, he says.

    But the latest feather in Penchina’s cap is his place within AngelList’s universe of so-called Syndicates, which are essentially pop-up funds that allow angel investors to syndicate their investments in exchange for 15 percent of any upside. (AngelList collects another 5 percent. There are no management fees.)

    Since the program was rolled out by AngelList roughly a year ago, Penchina has attracted 1,300 accredited investors who’ve committed to collectively plug up to $4.6 million into each deal he wants to make. Those numbers make his the largest Syndicate on the platform. They also give him the firepower, theoretically, of a mid-size venture fund.

    Penchina, who has already invested “between $5 million and $10 million” in startups through his syndicate, says he’s just getting started. We caught up yesterday. Our chat has been edited for length.

    You don’t have an office. You have no institutional investors. And yet you have a stunning amount of capital at your disposal suddenly.

    Yes. We only started nine months ago, and [our commitments are up] to $4.6 million per deal, which is slightly frightening when you’re used to writing $25,000 checks [from your personal bank account]. We’ve now led two A rounds, for [the sales prospecting company] Datanyze and *Contactually [a relationship marketing platform], and we’re trying to do more [lead investing].

    We’ve also launched a SaaS syndicate, a bitcoin syndicate, an [Internet of Things] syndicate, and we’re launching a [financial technology] syndicate. And we’ve launched a late-stage syndicate for B and C rounds and we’re in the registration and comment period with regulatory authorities for a venture debt syndicate, which will be interesting once that’s up and running. Notionally, we want to [represent] every vertical, and every asset class – from bridge rounds to A and B and C rounds — so if investors want a more narrow thesis, they can invest in it. If they want a broader thesis, they can in invest in my main syndicate and get a more diversified pool of investments.

    Wow. How much have investors committed to these vertical syndicates?

    The SaaS syndicate has [commitments of] $1.8 million, the late-stage syndicate has $1.1 million, bitcoin has $700,000. All of these ideas are getting some traction. Ultimately, I’m trying to build Fidelity, with fund managers who specialize in certain sectors.

    Who are all these investors?

    We get a mix. When you democratize and reduce friction, everyone shows up. CEOs, dentists, young guys who are making their first investment. Six months ago, we had 200 investors. Today we have 1,300. If things continue [apace], we’ll have 10,000 investors in a year’s time.

    And who’s the “we” when you refer to your syndicates?

    There are two managers per syndicate. They aren’t full time but rather executives in each particular vertical. One is a chief revenue officer, another is a product executive, another is the CEO of a bitcoin company.

    We also have 30 volunteers, from associates at venture firms, to executives who think these syndicates are a great way to learn about other industries, to people who want to work in venture and think [helping us] is a great training ground.

    These managers and volunteers are essentially scouts? Do you promise them a percentage of your carry if they bring you something you eventually decide to fund?

    It isn’t that structured. We aren’t making management fees, though, so I [will] share the carry with [everyone who helps me]. We want everyone’s interests aligned, so that if there’s a mediocre deal, we don’t do it.

    By the way, we’re always looking for new recruits, if you can let your readers know.

    How would you describe your pacing, and what size checks are you writing right now?

    We did smaller deals at first, a couple hundred thousand dollars here and there to see how it works. Then we moved from $200,000 to $500,000 and now we’re writing checks of $1 million. Six months ago, we’d do a deal every two months and in October, we’ve already done three deals, two of which were $1 million, so the pace seems to be getting faster every month.

    The public market has been been volatile. Meanwhile, unlike a traditional fund’s investors, Syndicate investors can opt out of deals or opt out entirely. You must be seeing some kind of pullback.

    I’m not. The market was up last week; it was down the week before. You have to remember that AngelList is growing at a rapid rate itself, so every day, new people are joining the crowd, and a rising tide raises all boats. Even if my boat is a little leaky, I don’t notice it because I’m [moving up] and not down.

    You’ve said before that the beauty of AngelList for an investor like yourself is not having to deal with attorneys and LPs. AngelList sets up the funds; it handles customer accounting. But AngelList has a lot of out-of-pocket fees as a result, something like $12,000 per fund, cofounder Naval Ravikant told me last year. Do you worry that it’s not sustainable, given that AngelList is not yet producing revenue?

    No. Putting together an LLC is a bunch of legal docs. Costs are higher now because there are probably 75 different permutations of deal structures or term sheets, but at some point, they’ll have a template for every one of the damn things and it will be cheap. More and more of this will get automated – reporting, tax [considerations]. I’m really not sure why anyone would start a micro fund in 2014 when they could start a Syndicate for zero dollars instead and not spend a lot of time doing the annual accounting or figuring out the legal structure of this stuff.

    *The original version of this story misidentified Penchina’s investment as in Contractually, a different startup.

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    Connie

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  • Boris Wertz Raises a New, Much Bigger Fund

    Boris WertzVersion One Ventures, the Vancouver-based fund of entrepreneur-turned-investor Boris Wertz, is taking the wraps off a $35 million early-stage fund today. That’s nearly twice the size of Wertz’s $20 million debut fund, closed in early 2012. Northleaf Venture Catalyst Fund and BDC Capital are the new fund’s anchor investors.

    As you might imagine, the extra capital will allow Wertz to write bigger checks. In a call yesterday, he said he now plans to make initial investments of between $500,000 and $750,000, up from $250,000 to $300,000, a shift that should allow him to lead more deals. The bigger pool should also enable Wertz to pour more follow-on funding into Version One’s existing portfolio, which right now includes the online cosmetics company Julep; the business intelligence platform Mattermark; and Kinnek, an online platform that brings together small businesses with suppliers.

    All told, said Wertz, he plans to invest his second fund in 20 to 25 companies. I asked him what else he’s planning for, particularly amid what feel like big shifts in the market.

    Congratulations on the your new fund. That’s quite a jump up in size.

    Thank you. We set out to raise $30 million and probably could have raised $40 million but didn’t want to make it larger. I’m still the single investing partner, and we think a good benchmark is $30 million to $35 million per partner, which is what you see at comparable funds like Floodgate.

    You say the collective value of Version One’s portfolio is now $600 million. Recognizing it’s early days, have any companies exited yet?

    No, angel investments I made prior to [creating Version One] have [been acquired] like Flurry [sold to Yahoo], but one rocket ship in our portfolio – [a consumer marketplace] that has raised an A and B round – hasn’t even announced [its funding publicly].

    More companies are waiting on their funding announcements. Why do you think that is?

    We have two companies in our portfolio that have raised [capital] and never announced. The entrepreneurs feel that they’re on to something and want to get solid traction and a head start before telling anybody else. It makes sense, especially if you have a product where you aren’t going to acquire users on StrictlyVC or TechCrunch and don’t need [the press] for branding purposes.

    You live in Vancouver but invest all around North America, including Silicon Valley. What are you seeing in terms of seed-stage valuations right now?

    Two-thirds to three-quarters of our deals are outside the Valley – in Seattle, Toronto, and New York. And those ecosystems have never gotten that crazy. But there’s definitely a little insecurity in the market, which is good, given that seed-stage valuations have continued to creep up over the last three or four years. I think we’re seeing a healthy correction of expectations on the part of both investors and entrepreneurs. Things can’t always go in one direction.

    When we last talked, in May, you were spending more time looking into digital healthcare, government “2.0” and bitcoin. Have you made any related bets yet?

    We have one digital healthcare investment, [Figure 1, a crowdsourced medical image library for health care professionals that VersionOne invested in last December], but the challenge in [backing another] is that it has blown up crazily in terms of valuations. Look at the on-demand doctor space. There are at least eight players, all of which were well-funded at crazy valuations. [The sector] ran away pretty quickly.

    As for bitcoin, we believe in the long-term potential, but we’re still forming an investing thesis around when is the right moment to invest.

    It must be challenging. I’m amazed by how many seriously smart people are divided over bitcoin.

    I’m in the middle. The technical platform is beautiful, and a decentralized system to record ownership makes a lot of sense for a lot of use cases. I think the real problem is that right now, there isn’t a killer use case. Payments in North America aren’t broken. I can use credit and debit cards or cash or PayPal. So people need to start focusing more on international payments and remittances, where bitcoin does make sense. The challenge is how to get into the markets that could use it the most – Brazil, Vietnam, Nigeria – and make it easy to spread. And there’s no clear path [to doing that], though we do believe some entrepreneurs will eventually figure it out.

    A prominent institutional LP recently said that right now could be an especially bad time to start investing a new fund based on traditional market cycles. Is that a concern of yours?

    Yes, there are cycles, but nobody can really predict them. You can only make your best investments given the environment and stay disciplined around valuations and your investment thesis and not get carried away by hype. The reality is that some vintages of funds will do better than others based on waves of new innovations or when valuations were really low. But it’s hard to predict beforehand and say 2014 or 2015 will be a terrible year for venture funds. Who knows? Timing and luck are involved in all of it, but if you focus on fundamentals and support your companies for the long term, you can hopefully smooth out your returns over time.

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    Connie

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  • Why You Can Probably Forget About Going Public Any Time Soon

    saynotoiposYou may have noticed: The market has been hitting the skids as investors grow nervous over a broadening array of concerns from Ebola to expected interest rate hikes. In fact, as of the market’s close yesterday, U.S. stock indexes had fallen almost 10 percent since the beginning of last week — nearly enough to constitute an official correction.

    Things aren’t looking so great for recent tech issuers, either. Despite their highly celebrated IPOs, the shares of Yodlee, Wayfair, Hubspot and even Alibaba are down from their first day “pops,” and that “doesn’t work for IPO investors,” notes Kathleen Smith, a principal of Renaissance Capital, which manages an exchange-traded fund that tracks recent IPOs. “All these IPOs are not showing post first-day performance, which makes it hard for [other, still-private companies] to come out.”

    The IPO market is tied to the whims of the stock market, of course, but there are specific reasons that new tech stocks are sinking, says Smith. First and foremost, she says, the issue is linked to who, exactly, is acquiring new shares. “All this year, we’ve had a different set of buyers. It’s not the individual investors or small cap managers who, 10 years ago, might have talked up the stocks they were buying. They aren’t big commission generators for Wall Street, so it’s harder for them to get allocations,” she says.

    Smith thinks new issuers have been pricing their shares too richly, too. “It’s all about price discovery,” she says. “Public market investors aren’t tolerating excessive valuations. If companies think they come out at high valuations and watch their shares continue to rise, well, we’re not in that kind of market.”

    There’s also the so-called Alibaba effect to consider, notes John Fitzgibbon, founder of the research firm I.P.O. Scoop, which tracks IPOs. He compares the anticipation that surrounded the Chinese e-commerce giant’s September 19 IPO to what happened when both Facebook and Google went public, saying that in all three cases, public market investors have struggled with what next to get excited about. “The circus has left town,” says Fitzgibbon. “Alibaba was a one-day event. And now we’re back to the reality of the stock market, which is performing under the shadow of the [broader] stock market.”

    Fitzgibbon characterizes the market’s recent gyrations as a “healthy, sobering pullback.” Stocks are “bought on hype, held in greed and sold in fear. That’s your cycle,” he says, while declining to speculate about whether investors are likely to buy, hold, or continue to sell in the immediate future.

    Smith sounds more convinced that continued trouble lay ahead. “Private investors must be feeling nervous,” she says. “I know Box has talked about coming public. I see big companies in the pipeline. And a lot of them, I wonder about.”

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    Connie

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  • Industry Ventures on Its New Fund, Cheap Stakes, and the State of the Market

    Hans SwildensHans Swildens is taking a break at his offices in San Francisco. “This is the first Monday in a long time that I haven’t been fundraising,” he says.

    It’s easy to understand why he’s exhausted. Swildens’s 15-year-old investment firm, Industry Ventures, has raised one fund after another in recent years, closing on a $425 million secondary fund 10 months ago and its newest vehicle — a $170 million venture capital fund of funds – late last week. At least in today’s market, the fundraising has come easier. In fact, the newest fund’s predecessor was $70 million, and the predecessor to that fund was $30 million.

    In conversation with StrictlyVC, Swildens talks about those funds, as well as what he’s seeing more broadly at Industry Ventures, which has assembled stakes in roughly 140 venture firms over the years (including True Ventures and Foundry Group) and developed one of the most intricate views into the startup ecosystem in the process.

    Your newest fund will make direct investments in sub-$250 million venture funds. But you’ll also use it to acquire secondary stakes in small venture funds and to co-invest directly with your fund managers. How much of the fund do you think you’ll allocate to each?

    We don’t have a hard rule, but in [our previous fund], it was about 40 percent in primary commitments, 40 percent in LP commitments, and 20 percent in co-investments.

    It’s such a go-go market. When it comes to snapping up those secondary stakes, where are you finding LPs who want to sell their venture fund shares?

    There are always investors who have to sell, though typically, it’s not the endowments or pension funds – it’s everyone else. We just bought two different corporations’ fund interests in two different venture funds. A lot of [sellers] today are individuals and family offices. Sometimes, [micro VC managers will] raise quickly between funds because they’re small and we’ll take half the [individual investors’] old commitment so they [have liquidity] to invest in the manager’s new fund, too. Compared with five years ago, there aren’t as many sellers, though.

    Are you chasing after funds? Are they coming to you?

    Eighty to ninety percent of what we do is proactive.

    How do you decide what to pursue?

    We have a relational database and we model the funds; we have a group of associates and partners here – almost 20 now. And we’re an LP in about 20 percent of the managers in the U.S. We have 140 venture firm stakes. And we get reporting on all of them every quarter, so we’re constantly looking at [that information].

    What’s performing and what’s not performing, in your view?

    Some say there are too many people doing seed and Series A deals – that things have grown crowded. But valuations haven’t moved that much in the last three to five years; they’re still in somewhat normal ranges. Late-stage valuations have become more inflated, of course. There are 45 $1-billion-plus companies [in terms of valuation] compared with four [in 2009]. So it’s a little trickier to buy into that market. If you’re buying into those deals, you have to have more conviction around what you’re buying. Our thesis is that it’s better to be in smaller funds that are shopping earlier.

    What about your secondary funds, like your 10-month-old, $425 million fund – are you buying into more mature companies and funds with that capital?

    We are, but our investment pace is about 25 percent slower than last year owing to us being more conservative about valuations. We’d started to bump into mutual funds and hedge funds that have come into the market with later-stage tender offers and secondary offers, and we decided not to compete head-to-head with them but maybe go a bit earlier in the cycle, writing smaller checks.

    Your secondaries business involves buying employee shares. What’s that like these days?

    The market has gotten much more complicated as it has evolved, with funds now exclusively doing loan deals for stock, companies that are doing tender offers, companies telling their CFOs to “work with these four parties” and if you aren’t on the list, you can’t get any information. That’s the bad. The good is that we’ve been in the market for more than a decade and everyone knows us, so we’ve been slotted into a lot of these [employee sale] processes.

    What do you make of some newer funds that lend money to shareholders and employees rather than acquire their shares outright? Would you ever get into the business of loaning employees money against their shares?

    We’d consider it, but our preference is to buy the stock. We’ve been doing this long enough to know that in good markets, loan structures work for both parties, but in bad markets, that’s not true, and three or four years from now, we don’t want regrets on either side.

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

    Connie

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  • In Palo Alto, a Micro Community in the Making

    demo dayOn Tuesday, in leafy Palo Alto, Ca., tucked away in a nondescript office enlivened by bright, computer-themed art, the 1.5-year-old early-stage firm Pejman Mar Ventures welcomed journalists and investors to watch half a dozen startups explain what it is that they’re doing. Four of the teams were comprised of Stanford students who had tinkered on their nascent ideas at Pejman Mar’s offices this past summer. The other two startups that presented are fully up and running and about to hit the fundraising trail.

    In terms of quantity, it wasn’t much of a showcase. Two of the four Stanford-led teams are returning to school, its founders determined to finish their computer science PhDs. Pejman Mar’s timing could have been better, too, given everything else that was going on in the Bay Area on Tuesday, including Apple’s highly anticipated launch event and TechCrunch’s signature fall conference in San Francisco.

    Still, plenty of VCs and reporters showed up — including from SoftTech VC, Floodgate, CRV, and Forbes — and for two reasons, seemingly.

    First, Pejman Nozad and Mar Hershenson, the firm’s likable cofounders, are highly focused on creating a community around their young firm. Making room for ambitious Stanford students to hole up during the summer months is one way of going about it.

    The pair also hold weekly events at their space that feature VCs and renowned founders. Past guests include John Doerr of Kleiner Perkins, Yahoo cofounder Jerry Yang, and Zynga founder Mark Pincus — though an even more popular attraction, says Nozad, is a life coach who comes twice a month to help founders with their personal problems. (“When you say you’re going to have a VC here, maybe 10 or 20 people come,” he says. “As soon as we announced the life coach, we had a wait list.”)

    Of course, squishier stuff aside, investors are paying close attention to Pejman Mar because of its track record to date.

    On his own, Nozad, who famously sold rugs to tech millionaires before becoming a full-time investor, has backed more than 100 companies over the last 14 years, many of which have gone on to big exits, including the early smartphone company Danger, which sold to Microsoft in 2008 for $500 million. (It’s also through Danger that Nozad met Hershenson, a three-time entrepreneur whose husband cofounded Danger.)

    photo 2Since launching their fund a year and a half ago, the pair have backed another 21 companies, half of which have raised follow-on rounds – including some doozies. DoorDash, for example, a 1.5-year-old, Palo Alto-based restaurant food delivery startup, closed on a $17.3 million Series A round in May led by Sequoia. The company has raised $19.7 million altogether. Guardant Health, a Redwood City, Ca.-based startup that has developed a blood test for cancer, has also gone on to raise significant funding, most recently raising a $30 million Series B round in April led by Khosla Ventures. Guardant has raised at least $40 million altogether.

    Little wonder that on Tuesday, VCs were paying close attention to the two startups that will soon be seeking funding: Solvvy, which is trying to reinvent mobile search and has so far raised $500,000 from Pejman Mar (it’s seeking out more seed funding this fall), and Fieldbook, whose software lets users track and organize their information in simple data tables. Fieldbook has also raised $500,000, including from Pejman Mar; AngelList cofounder Naval Ravikant; former Microsoft executive Steven Sinofsky; and Lotus founder Mitch Kapor. The company says it will seek out more funding in the middle of next year.

    It’s a little early to know whether the assembled investors connected with the startups this past week. With Pejman Mar’s growing reputation, though, it’s easy to imagine they’ll find interest somewhere along the line. “These companies are for real,” Nozad told me on Tuesday, looking like a proud parent as the crowd chatted with the presenting companies. “They’re great people.”

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    Connie

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