• Semil Shah: A Part-Time VC No Longer

    semil.shahAbout a year ago, I sat down with Semil Shah, a plugged-in networker who, back then, was working nearly full time at a podcasting company called Swell and spending his spare time participating in some of the hottest seed-stage financings in Silicon Valley.

    Today, Shah is no longer at Swell, which was acquired by Apple last July. Instead, the part-time VC, as I’d dubbed him, is moving closer to the life he has long wanted as a full-time investor, with a new fund and roles as a venture advisor at two very different venture firms, GGV Capital and Bullpen Capital. We chatted on Friday about how he’s pulling it off. Our conversation has been edited for length.

    Last December, you were investing a $1 million fund. You’d backed 16 companies and you were beginning to think about a $5 million fund. Now I hear that you’re almost there with a second fund.

    Yes, I wound up investing that $1 million vehicle pretty evenly across 35 companies. The idea was to get my feet wet and learn all the little things about investing, like what referrals are like and how you decide to invest and how you interact with a company when you want to fund it and how you interact with a company when you don’t. I learned a lot. Raising a million dollars was not easy. Just trying to put $25,000 into companies wasn’t easy. You have to explain a lot [about the value you bring] and you need other people who are investing to support you. The amount of work and reputation required, even to make a small investment, was surprising.

    What would you say is the standout of that first fund, and have you had an exits?

    The standout is probably [the same-day grocery delivery company] Instacart, which has grown quickly and attracted a lot of attention, though there are a number that are on a great trajectory: DoorDash, Hired, Coin, HashiCorp.

    I’ve had a couple of exits in fund one, but the money wasn’t significant enough to distribute, so I’m still holding it. I could technically recycle it versus distribute it, but I’m not sure I’ll have the opportunity to do that. In fund two, my hope is to follow on in one or two companies, but that’s always up to the entrepreneur, not investors.

    Are you getting enough ownership in these startups to make this model work?

    If you go in early enough, you can have decent size ownership without doing a follow-on. I’m looking at companies before they get to Y Combinator. Part of the reason I enjoy writing so much and being active on Twitter is that I can explain what I’m thinking in real time and people reach out. I’ve had people contact me who don’t know me and introduce me to startups; they’ll just say, I know you like this stuff, and I thought you’d like this company.

    You also seem masterful at networking.

    Honestly, everything I’ve done has been born out of pain more than opportunity. I’d hoped to invest for a long time but I don’t have the typical background required and there are very few jobs. A couple of my friends [in the industry] kind of pulled me aside a couple of years ago and slapped me and said, You have to stop asking people for a job and figure out how to do it yourself.

    Have you been making investments from your newest fund?

    I’ve invested in 20 companies so far, including Chain, a block chain company that ended up being funded by Khosla Ventures, and [office cleaning startup] Managed by Q.

    Where do you want to be five years from now?

    Right now I’m operating on instinct and making decisions in three, four, five days. I put a lot of thought into each investment, but there isn’t much data to go off. As I invest more, I’d like it to be on a path of more concentrated investments.

    I also know I don’t want to be investing by myself. In general, it can be lonely, but you can also get stuck in your own way of thinking. I definitely want to be investing in the early stage somewhere, though.

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    Connie

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  • StrictlyVC: June 16, 2014

    Good morning, all; hope you had a wonderful weekend. Go U.S.A.!

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    Top News in the A.M.

    Verizon says it wants to kill net neutrality to help blind, deaf, and disabled people. But, surprise, groups representing disabled Americans, including the National Association of the Deaf, the National Federation of the Blind, and the American Association of People with Disabilities aren’t advocating for this plan, reports Mother Jones.

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    Jeff Clavier on Dilution, Marketing, and Series A Stunts

    Last week, for a conference in San Francisco, I was asked to interview Jeff Clavier, the straight-shooting founder of the early-stage investment firm SoftTech VC. We were tasked with addressing the so-called Series A crunch and its ripple effects. As part of that chat — edited here for length — Clavier volunteered some interesting tidbits, including how to prepare startups for their next round of funding, and the most ruthless firm on Sand Hill Road.

    You aim for a certain ownership percentage with each deal. Do things usually go as planned? I hear of uncomfortable situations cropping up between Series A and earlier investors.

    When you invest at the seed round, you have the legal right to maintain ownership provided that you clear the hurdle of being a major investor, and we always ask to be a major investor and have pro rata rights. However it’s true that there are some Series A firms on Sand Hill – I won’t mention any names but one that comes to mind starts with an S – that always try to cut you out of your pro rata ownership because they always want to take as big a chunk as possible of Series A rounds. They typically want something in the 30 percent range.

    If you want to take 30 percent and let insiders take their pro rata, that’s going to be a pretty dilutive round for the founders, so there are some games that they play. The way to counter the game is to organize a bit of a process where you can have multiple firms submitting term sheets, then figure out which is most interesting and the fairest to the founders as well as the insiders.

    Are you seeing more Series A firms try to elbow seed-stage investors out of the picture entirely?

    Yes, the “piggy” round. . . We have seen entrepreneurs take these rounds in lieu of a seed round – mostly people who’ve been around the block once or twice — and if there’s enough conviction from the VC to help entrepreneurs with the earliest stages of their companies’ life, it’s great for the entrepreneurs.

    Is that true from an equity standpoint, too? I wonder whether it’s good that — with so many seed and post-seed rounds today — entrepreneurs have given investors 20 percent of their startups before they even reach a Series A financing.

    It’s actually more than that. The seed round dilution is typically 20 to 25 percent dilution, plus [there’s the issue of] the option pool, meaning reserves for future hires. When you tack on your Series A – and some firms try to get 25 to 30 percent ownership for themselves, then you have the add-on of the insiders pro rata, which can be five to seven percent – those two rounds can be pretty dilutive.

    What we’ve seen with companies that are doing really well and are sort of “hot” is the percentage target of the Series A investor will go from 25 to 30 percent to 20 to sometimes 15 percent, because when you’re in a competitive situation, paying up is not the only way. Being easy to deal with and friendly from a term sheet perspective is also a way to win those competitive situations.

    So really only the hottest entrepreneurs are not getting screwed.

    I wouldn’t say screwed. If you can [run your company without outside investors and it’s a hit], you’re home free. [If you can’t], it’s really the support and help that you’re going to get alongside the cash that makes a fundamental difference in the seed-to-Series-A journey. You pay in dilution for what you get in terms of capital and support.

    Given that it’s your biggest challenge, how do you help your seed-funded companies nab Series A funding?

    Part of it is understanding the market dynamic. You know that some firms like to meet startups very early on and create relationships over a year, for example, like our friends at Emergence Capital. They love to meet companies way ahead of any fundraising, so roughly a year before we know we’ll have to fundraise, we’ll either introduce our companies to them or they’ll ping us, because they’re pretty good at that. Then, a year later, we’ll [reach out to say], “They’re thinking of doing a round, we’d love to get your feedback,” wink, wink.

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    New Fundings

    91JinRong.com, a three-year-old Beijing-based company whose online platform acts as middleman between loan providers and individuals or companies who need financing (generating revenue from listing fees, advertising and commissions), has raised $10 million in Series B financing from Lightspeed Venture Partners, according to China Money Network. The company has raised roughly $20 million to date, including from Matrix Partners, says the report.

    Besomebody, a three-year-old, Austin, Tx.-based social network, has raised $1 million in seed funding from media company The E.W. Scripps Company.

    Boston-Power Inc., a nine-year-old, China-based company whose battery manufacturing operations were originally based in the U.S., has raised new funding of approximately $250 million from unnamed Chinese and other global institutional investors, reports Venture Capital Dispatch. The company had previously raised $100 million led by GSR Ventures, where Boston-Power’s chairman and acting chief executive, Sonny Wu, is a managing director. The company’s other investors include Oak Investment Partners and Foundation Asset Management.

    CounterTack, a three-year-old, Waltham, Ma.-based firm whose security software monitors endpoints throughout a customer’s organization to watch, then quash, the behavior of hackers, has raised an additional $5 million in Series B funding from Razor’s Edge Ventures. The company, which closes the round with $20 million, has now raised $36 million altogether, including from Goldman Sachs, Siemens, Fairhaven Capital and OnPoint Technologies, the venture capital arm of the U.S. Army.

    Lucid, a 10-year-old, Oakland, Ca.-based company that develops operating systems for energy management in buildings, has raised $8.2 million in Series B funding led by Formation 8 Partners. Zetta Venture Partners also participated in the round, which brings the company’s total funding to $9.9 million, shows Crunchbase.

    Moment.me, a two-year-old, New York-based company whose online platform helps users assemble mobile microsites for events, has raised $1.65 million in new funding form earlier investors Singtel Inov8 and Blumberg Capital, along with an unnamed European fund. The company has raised $3.2 million in funding to date, shows Crunchbase.

    Instacart, a two-year-old, San Francisco-based same-day grocery delivery company, has raised $44 million in Series B funding led by Andreessen Horowitz. Earlier backers Sequoia Capital, Khosla Ventures and Canaan Partners also contributed to the round, as did Box CEO Aaron Levie and Y Combinator president Sam Altman. The company has now raised $54.8 million altogether, shows Crunchbase.

    Valencell, an eight-year-old, Raleigh, N.C.-based maker of biometric data sensor technology, has raised more than $7 million in Series C funding, including from TDF Ventures, True Ventures and Best Buy Capital. The company has raised more than $13 million in funding to date and more than $3 million in grants.

    WeLab Holdings, a year-old, Hong Kong-based Internet finance start-up, has raised $14 million from Li Ka-shing, Asia’s richest man, and Sequoia Capital. Dealbook has more here.

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    New Funds

    Frost Venture Partners, a four-year-old, San Juan Capistrano, Ca.-based incubator, has raised $38.4 million for its Frost VP Early Stage Fund II LP, shows a new SEC filing that doesn’t list a target. The firm, which partners with major corporations to identify gaps in their big data analytics arsenals, has spun out a number of companies, including Predixion Software, Cirro, and OspreyData. The firm was founded by Stuart Frost, the founder of DatAllegro, a maker of data warehouse appliances that Microsoft acquired in 2008 for $275 million.

    New Science Ventures, a 10-year-old, New York-based venture firm that backs both life sciences and IT startups across the globe, has raised $12.4 million for a third fund that’s targeting $100 million, shows an SEC filing. Svelte Medical Systems, a 6.5-year-old, New Providence, N.J.-based maker of expandable coronary stents, is among its portfolio companies.

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    Exits

    European daily deal aggregator Bownty has acquired local competitor Yunait, which claims to be the leader in Southern Europe. TechCrunch has more here.

    Earbits, a 4.5-year-old, Venice, Ca.-based commercial-free, music-streaming service, is shutting down. The company had raised roughly $630,000 in seed funding, shows Crunchbase. Its investors included Bee Partners, Start Fund, Charles River Ventures, and individual investors.

    Milestone Systems, a 16-year-old, Denmark-based open platform company focusing on IP video management software for surveillance systems, has been acquired by Canon Europe. Terms of the deal aren’t being disclosed. Milestone had raised $27 million from Index Ventures, shows Crunchbase.

    Rational Group, the 13-year-old, Isle of Man-based parent company of the online games “PokerStars” and “Full Tilt Poker,” which reportedly have more than 85 million registered players, has been acquired for $4.9 billion by Amaya Gaming Group, a publicly traded, Montreal-based gaming company. The Las Vegas Review-Journal has more here.

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    People

    Fortune profiles Tony Fadell of Nest Labs, asking: Could he jump back to Apple some day, having proven himself away from his former employer? Or might he ultimately be a candidate to succeed Google CEO and cofounder Larry Page?

    Halsey Minor, CNET cofounder and newly minted bitcoin entrepreneur, says he doesn’t “believe bitcoin will be the last coin we will all be using. We went through a whole bunch of search engines before we got to Google.”

    Investor-entrepreneur Keith Rabois talks with investor Semil Shah about his new company, Homerun, and how the Bay Area’s housing crisis might resolve itself: “Oakland should be the second-best place in the world to start a company and maybe, even one day, the best place in the world.”

    That’s a lot of space: Apple Tree Life Sciences is relocating from Princeton, N.J., and just signed a 10-year lease for roughly 14,000 square feet at 230 Park Avenue.

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    Job Listings

    Seedchange, a two-year-old, San Francisco-based online broker-dealer looking to connect investors with early-stage startups, needs a director of venture capital business development.

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    Happenings

    If you’re in the area: 32 high-tech companies from Michigan and the Midwest will make pitches for funding Tuesday and Wednesday at the 33rd Michigan Growth Capital Symposium in Ann Arbor.

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    Data

    CB Insights looks at those venture firms with the most portfolio companies to go public so far in 2014.

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    Essential Reads

    Bad news: Bitcoin may not so decentralized after all.

    LinkedIn in facing a lawsuit for emailing user contacts without permission.

    The dark side of Facebook, where people lie, steal, and make millions.

    Why U.S. venture firms can’t find the Twitter of China.

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    Detours

    Why we sleep together.

    When street art meets high finance.

    What $3,600 a month can rent you right now around New York City.

    The Beyoncelogues.

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    Retail Therapy

    Storage bins, for Gen Xers.

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    Connie

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