• For Jeff Clavier of SoftTech VC, a New Partner and Some Deja Vu

    Jeff ClavierBeginning next month, the Bay Area venture firm SoftTech VC will undergo a management change, with partner Charles Hudson beginning a transition out of the firm to start his own fund, and a new venture partner, Andy McLoughlin, who cofounded the enterprise collaboration startup Huddle, joining full time to focus on business-to-business opportunities.

    For SoftTech founder Jeff Clavier, it must feel like a bit of déjà vu. It was 11 years ago, working for the venture arm of Reuters, that Clavier decided to gamble on himself and strike out on his own. SoftTech has since grown from a one-man operation into a well-regarded early-stage investment firm with more than 160 investments to its name and four funds, including an $85 million pool that it closed on last year.

    As the firm has evolved, so has its mandate. “Something like 500 companies now ping us every quarter, and we invest in four or five,” Clavier says of the firm, whose average check size today is $750,000. Not only does SoftTech “have the luxury of trying to get the right level of signals before we invest,” he adds, but the firm’s LPs expect it.

    That evolution has made it harder for Hudson to chase the nascent ideas about which he’s most passionate, acknowledges Clavier, who recruited Hudson into SoftTech as a venture partner in 2010 and promoted him to partner in 2013. In fact, says Clavier, Hudson decided several months ago to raise his own, “pre-seed” fund, an effort that Clavier says he fully supports. (Owing to SEC rules, Hudson can’t talk yet about that fund, but we’ve learned that its brand, for now at least, is Precursor VC.)

    It will be a gradual move out of SoftTech for Hudson, who is expected to manage his startups through the end of the current fund’s investing period, in the summer of 2016.

    In the meantime, notes Clavier, McLoughlin brings SoftTech far more expertise in enterprise startups as it looks to shift more of its capital from business-to-consumer startups to businesses catering to other businesses.

    Not only has McLoughlin been scaling his own enterprise business first-hand at Huddle (which remains privately held), but he has made more than 35 investments as an angel investor over the last five years, many of them on exactly the types of companies that SoftTech has grown more interested in funding. Among those bets is Apiary, a San Francisco-based company whose tools help companies build, test, monitor, and document web APIs; and PipeDrive, a maker of sales pipeline software that’s based in Menlo Park, Ca.

    “Charles and I had in mind to bring in a new investment professional [who], on the one side is a SaaS cofounder who has seen different levels [of growth] over many years, and [on the other], is someone who can help set up sales, marketing, and customer success [for our startups],” says Clavier.

    “From that standpoint — and many others — Andy is a score.”

  • Jeff Clavier on Dilution, Marketing, and Series A Stunts

    survivorLast 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.

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

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

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

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

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

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

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

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

    What’s been your experience specifically?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    What’s the biggest misconception about what you do?

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

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

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

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

    What are some mistakes from which you’ve learned?

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


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

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

    Any other missteps that might be instructive?

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

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

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

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

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

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

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

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

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

    Anything else people should expect to experience?

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

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