Quickly Unpacking The Uber “Softbank IPO” Exit

Whenever there’s a big startup exit, I try to quickly unpack it here on the blog. There’s been so much news about Uber for the past year and more that, frankly, I have tuned most of it out. It’s almost laughable now three years ago, I actually thought about writing a book on this company and sector. Ultimately, I started a weekly newsletter around it and still couldn’t keep up on all the news forming around this company.

With that backdrop as context, it almost slipped my mind that the tech startup world and the SF Bay Area, in particular, experienced a huge “exit” with the Uber-Softbank deal. I write “exit” in quotes, however, because it is not the type we are used to waiting for or dissecting or even the type we get to see up close. As Fred Wilson noted this morning, USV and other firms can be creative about when to “take money off the table” — for more on this, make sure to check out Fred’s interview at the 2016 Upfront Summit, which goes into more detail.

Alright then, let’s unpack this new, huge exit:

1/ An Unprecedented Transaction In Silicon Valley History? With Masa-san’s $9B “down-round” investment in Uber, which included a multi-billion dollar secondary for early shareholders, is this the single greatest secondary transaction for a technology startup ever? I am not a startup or Silicon Valley historian, but I have to think it is the largest and therefore truly historic. (If someone actually knows the history here, please LMK.)

2/ First Real Ecosystem Impact Of The Softbank Effect: It’s been a parlor game to date to talk about the impact of Softbank’s Vision Fund — well, now we know, and it is a major player. As I wrote about in my 2017 review, “The Softbank Effect” presents an entirely new way for early-stage shareholders to get liquid, assuming one of their investments reaches the bar for Masa-san. This isn’t a new normal, however — this is more of an outlier, like startup exits themselves, and therefore cannot be extrapolated from.

3/ Billions In Cash Flow Back To VCs and LPs: Here, early Uber shareholders were eager to liquidate (oversubscribed, per Connie Loizos’ sleuthy reporting), resulting in real meaningful liquidity in an exit environment which has been relatively dry of late. In reading Connie’s piece, we see big returns with fractional sales by First Round Capital, Benchmark, and Menlo Ventures, and there are likely others in the mix. This is overall good news for the ecosystem as LPs will book some returns to reinvest in VC, firms can take care of their own, and early shareholders, angels, and early employees (I’m hoping) can get some dough. This may also help break open the dam that used to clog secondaries at Uber.

4/ There’s Always A Liquidity Discount: As Uber’s valuations were always struck in private financing rounds, it became a parlor game to track its meteoric rise. Had Uber gone public on traditional stock markets, however, it is likely safe to assume it would’ve been trading at an even steeper discount Masa-san won in the deal with. This also begs the question: Will Uber ever go public? Given its strategic importance to various governments (which are LPs in The Vision Fund) as critical infrastructure and networks, it is not crazy to think the company could remain private for longer. My own prediction is I’m Dara Believer and feel he and his new team will make improvements (loyalty, fix the app, and a Priceline-like travel portfolio, etc) and restore Uber to what it should’ve been.

5/ An Up-Lyfting Development? To be fair, however, it is not crazy to think that Uber’s growth could also significantly slowly under the sheer weight of its historical baggage, board reshuffling, and executive changes. I wouldn’t have believed this a year ago. That means other global players in Masa-san’s network can prey on those weaknesses, and an asset like Lyft (which is now likely undervalued by the private market) now has an opportunity to partner with a variety of players. It will be interesting to watch Lyft in 2018, as well, as it has been successful in hiring great talent which also views the startup as having more “lift” in its valuation (pun intended).

6/ High-Stakes Poker Between Travis And Benchmark: Travis Kalanick is now out as CEO, cashed out for over a billion dollars. I honestly can’t keep track of whether he’s still on the Board of Directors. Now that Benchmark has dropped their lawsuit against him, it is clear to me (without any direct knowledge) that Benchmark had no choice but to use every tactic available — however unsavory — to boot Travis from his CEO role, and the cost of that was losing its Series A investor and longest-serving Board Member, Bill Gurley, in the fracas (Ben Thompson’s take on this here, as usual, was outstanding). As such, per Connie’s reporting, Benchmark still has more than 80% of its position locked up in Uber stock, cashing out enough to provide their LPs with 2x their fund size in one fell swoop, but lots of risks remain, and as Fred outlined earlier, a VC often can’t control when a liquidity opportunity comes by.

Looking Ahead, Predictions For 2018

Turning the page on 2017, here’s what I’m looking ahead to in 2018:

I want to keep this post brief as possible. Below is a set of predictions for 2018 in tech startups and VC. This is also a window into the principles and beliefs I hold and which, in turn, form my behavior and actions in the ecosystem. So, some of this is tipping my hand, but I would welcome being challenged on any and all of these claims ;-)

Before I begin, a brief review of my four 2017 predictions, located in full here. For the first three, I give myself a C, F, and F, mainly because they’re boring and too broad. However, for the last one, #4, man… I hit that out of the park: “Digital currencies will be offered as part of a sophisticated investor’s portfolio.”. A+ and if I only acted more on that impulse and the clues I received in Q3 of 2017. Hindsight is 20/20, they say.

Now back to 2018…

Venture Capital

IPOs For 2018 Are Ho-Hum; All Eyes On 2019 IPO Pipeline: Exits have been slumping for the past few years. 2017 wasn’t much better. However, there are some promising signs, most notably that the IPO pipeline for 2019 is STACKED. A few many rush to IPO this year ahead of the 2019 wave, but I am operating as if these IPOs will begin to form a massive wave in 2019 and slip into 2020. If these hit the market with full force, that will bring significant liquidity to the Bay Area. More on the effects of that below. For now, everyone has no choice but to remain patient. Check out GGV’s Glenn Solomon’s post on current state of IPO market in his year-end review as well.

2018 M&A Driven By Sectors Experiencing Most Existential Threats — namely, continuation in consumer retail, transformation of the automobile industry, and the meat and potatoes of technology infrastructure and software services.

Bay Area Inflation Continues To Distort Early-Stage Market: If you follow my tweets, you know that I’m concerned about local cost inflation and its impact on a startup’s runway. I get lots of private messages expressing both support of this view, as well as those who believe the Bay Area is really the only place to invest. For me, and my investing behavior, what I’ve opted for is a bit of structured geographic diversity in the portfolio, such that for every dollar I invest in the Bay Area, I try to invest another dollar outside the Bay Area. Within the Bay Area specifically, I try to split that dollar between SF proper and in startups who have elected to HQ outside the city limits — the Bay Area early-stage ecosystem — just like the weather around here — has distinct “microclimates” for prices and types of entrepreneurs to partner with.

Large VC Firms Get Cozier With Deep Tech: As the bigger VCs get bigger and diversify, we have begun to see them go beyond the app and infrastructure layer, and will see them go deeper in the tech stack (like chips, etc.) and even compete with focused Deep Tech firms. This will require them to take new risks and recruit a new type of GP. Easier said than done. Bilal Zuberi from Lux Capital touches on this trend (which he sees up close) in his year-end post.

Startups

Crypto Fever Won’t Subside: I continue to see very strong founders and builders starting and designing new products, services, and protocols in the world of crypto. From where I sit, that is my first-principles evidence that this is a sector that’s just getting started and here to stay. Sure, we will see more ICO scams, likely more lawsuits, more scrutiny around how ICO funds are issued, managed, held, and governed. One area I’m particularly fascinated with is the concept of stablecoins, and it appears the timing may be right for this critical crypto-infrastructure to be put into place for developers to leverage. For more on this topic, start with 1confirmation’s Nick Tomaino on stablecoins here.

I’m Optimistic About Another Startup Breakout For 2018: Every year, I like to dub a startup as “the breakout” of that year. This past year was Coinbase. A few years, I couldn’t pick one. I don’t know what it will be this year, but I am optimistic there will be 2-3 good ones to choose from and debate a year from now.

Incumbents

Predictions for Changes At Uber: I don’t know him, but I’m a Dara believer. I suspect with his experience and travel chops, Uber will finally introduce a proper loyalty and rewards program, they’ll improve their terrible, over-designed mobile app, and create tighter app and business integrations for travel, dining, and hotels, as a company like Priceline may approach such an opportunity. Within two years, Masa will have likely doubled his money.

Startups Shrugged: Someone whose tech thinking and experience I deeply respect — a16z’s Steve Sinofskyelegantly argues in this recent post about how tech incumbents have historically focused on protecting their market power versus building new products. I agree with the theory. But as I argued nearly two years ago now in the Feb 2, 2016 issue of Stratechery, I still believe today’s crop of tech giants are less likely to be disrupted because they’re all mostly executing well, buying new companies and integrating them well, and continue to amass power each year via the greatest network effect we’ve ever seen. What’s opened up in crypto, for example, is an entirely new space. So, I believe startups can leverage technology to open up and play in new spaces, but the audience sizes and lock-in required to compete head-on or even adjacently with these large incumbents is a not a game I’d want to play. This is why I like playing the game around open source (including parts of crypto), advances in cloud computing (like edge computing), technology seeping into heavy industry (which is starting to see some M&A), and infrastructure which can support the growth of consumer and enterprise networks, to name a few.

The Ecosystem Overall

The Political Economy Trumps Tech: No matter what advances technology, markets, and networks make, they are all still at the mercy of the political climate, and 2018 is set-up to be one of potential volatility. We will all digest the biggest changes to tax laws in over three decades, learning what the new rules mean in real-time; we will likely see much more from the FBI’s investigation into the Presidential Administration’s dealings, as well as the debate concerning the overall veracity of the findings it produces; and we will see more mainstream stories like this one from WIRED’s Erin Griffith on how “Big Tech and Startups” have compromised their trust with consumers, regulators, and society at large. This is against the backdrop of very strong tech incumbents, heightened interest in startup culture and participation, and a robust pipeline for private companies to IPO within the next 18-24 months. The more I analyze all these forces at play, I begin to wonder if many (not all) mistimed the cycle and will have waited too long to get liquid. Perhaps the one network effect which can trump Big Tech is a political network effect, and we began to see what that can do in 2017.

An Imperfect Glance At Tech’s Notable Exits In 2017

This will be a brief post looking back at some of the notable tech exits of 2017. Before we begin, there are many disclaimers that must be made… [note: if we missed a “notable” exit, please let me know & I’ll update the sheet…]

First, this is not complete and perfectly accurate data; this data is difficult to obtain, so we did our best with publicly available sources to find the most notable exits (read: not every single exit). Second, this data will not reflect a potentially decent number of acquisitions that are below $100M in sale price, as in many of those cases, the acquiring company (if public itself) isn’t required to publicly disclose such transactions. Third, without seeing the actual cap tables at time of sale, it’s difficult to know the specific ownership holdings for investors. Fourth, for the year’s tech IPOs, we looked at the work published by CNBC’s Ari Levy; as such, it is difficult to know what the stock price will be for companies that are still in a lock-up period. Fifth, the cooler exit environment (which has been going on for the past three years) has likely increased the volume of dollars going to purchasing and selling secondaries, and, well, that data is nearly impossible to get — except there’s Uber, which we are starting to get details on. Softbank’s recent investment in Uber will likely take care of early shareholders and, given the size, have the liquidity feel of a major IPO, except here there is no holding period. So, assume it’s happening, and happening at least at a 30%+ discount to the most recent valuation. Sixth, there may be some sampling error as most of the M&A list was crowdsourced. Seventh, reported sale prices for M&A may not be entirely accurate, as the tech press often has to triangulate what the final price was, and there are often earnouts and other hidden clauses that obscure the real exit value number. Eighth, some M&A involves stock from the acquirer, which could then be held and appreciate for the original shareholders. Still reading? And, finally, ninth: exits like these we see here in 2017 are themselves outlier events by definition. They don’t happen often. Therefore, one should be extra cautious in drawing conclusions from them. I will try to apply that level of caution below, and if you have a substantial correction or edit to suggest, please do let me know and I’ll do my best to update the spreadsheet.

Ok, so let’s get to it. To begin, here is a very rough worksheet (now in Google Sheets) we assembled to capture and organize this year’s exit data. You will see two tabs — one for M&A, the other for IPOs. Here are my quick takeaways from this:

M&A (16 notable/reported)
-Liquidity generated this year via M&A could see more dollars flow to outside the Bay Area than within the Bay Area, based on the headquarters listed for the companies which were acquired this year.
-Most of the M&A dollars are spent within the retail sector and on technology infrastructure, with glimmers of heavy industry participating, too.
-If we generously assume the largest private investment firms in each deal owned 15% of its portfolio company at the time of the sale, the total dollars generated per deal would often not be enough to “return the fund” (RTF).

Tech IPOs (14)
-Most tech IPOs this year were in the consumer/retail space, as well as in technology infrastructure and services, which is somewhat similar to the distribution for M&A this year.
-If we put Snap aside (as it’s the real outlier), we see roughly the same amount of dollars going into overall capital raises from founding to IPO (including the IPO itself) both outside and within the Bay Area.

The Ugly
-The majority of exits bring liquidity gains to the U.S. coasts — California and New York City, with a bit of Boston and others scattered across M&A.
-Looking out a few years ahead, most of the IPO pipeline is concentrated in California and China.

The Bad
-For another year, the total number of liquidity events seems and feels low given the amount of money flowing into tech startups.
-Most singular liquidity events listed in the exit table wouldn’t generate enough cash for the largest private investor to return their fund, assuming in each case the largest investor, at exit, owned a generous 15% ownership stake. In practice, most don’t hold as much as 15% at exit, so the math is telling us many funds we know by name may need 2-3 mega-outcomes to get a multiple on their fund. It is unclear how this all shakes out yet, and as you’ll see below, the big money is waiting until 2019-2020 to take stock of these strategies.
-The entire startup tech ecosystem will need to exercise more patience and wait, wait, wait for….

The Good
-Now, for the good news for the tech/startup ecosystem. A surging stock market (if it sticks) paired with massive corporate tax cuts could encourage public companies to acquire more aggressively while their own stock is surging with the tide. (Note, this should not be interpreted as an endorsement of a particular public policy.)
-It appears that there is a good chance future tech/startup liquidity events will spread out beyond California and New York as we look into the future.
-The pipeline for beyond 2018 for tech IPOs looks incredibly stacked (especially so in 2019), with big-time consumer names in high demand, such as: Uber, Slack, Airbnb, Stripe, Wish, WeWork, Lyft, Houzz, and many other lesser-known names.
-The wrinkle, however, is that most of this particular, high-demand pipeline consists of startups that are headquartered in California and China. Should those values hold, the returns will be concentrated here in the Bay Area and across the Pacific, minting more and more millionaires and continuing to both act as the fertilizer for funding the next wave of companies but also will place pressure on local price inflation.

Brief FAQ From Haystack IV Fundraising Experience

Earlier this year, I wrote a post detailing how I was able to transform Haystack into an institutional fund. As there continue to be more and more smaller and newer funds created per year, that post triggered a bunch of emails and follow-up questions, so I collected them to put together a short FAQ with some more detail that will hopefully help someone else out there. What I’ve found is some folks want to budget for time or meetings, and the like, and then when I share with them the actual stats, it’s both painful (see below) but also helpful to see it how it went down. It is mostly a random process, and now looking back, I was extremely fortunate this all happened relatively quickly.

Basic Stats…

Time for materials/strategy prep? 4 months
Time “in market”: 6 months
Time to close: 2 months
Number of LPs interacted with: 200+
Miles flown: 40,000
Nights away from home: 28 including 2 redeye
Haystack IV all-in: $22.3M (target $25M, soft cap $35M)
Final LP count: 59 (avg $370K/LP)
Largest LP commitment $5M
Smallest LP commitment $10K
VC Fund Founders as LPs: 5
Company Founders as LPs: 20
GP Commitment: 2%
GP Carry: 20%

What’s The Overall Mood of LPs With Respect To…

Overall Mood: They want distributions
Seed, sub $100M funds: They’re inundated with pitches
Single GP funds: For many, against their religion or procedural requirements
References: Increasingly, they’re going right to founders for info on GPs
Geography: Concerned Bay Area is saturated w/ high prices; increasing interest in seed for Seattle, NYC, LA, Boston

High-Level Surprises and Lessons…

Best/smartest LP questions asked? “Why are you doing this”?
What was feedback on the No’s? Main feedback was: check too small plus small ownership to date
What was the biggest mistake you made? Didn’t do a full enough deep-dive into portfolio construction (more on this in a later post)
What surprised you? How lucky I was at the end. It could’ve gone either way, fast; also, once you’re in a pipeline, it can go from very formal to random to the point where you can’t always stick to a plan; oh, and also, how quickly things move, to the point where you have to leave within 24 hrs while a conversation is warm, meeting people in airport lounges, “happening to be in town” to see specific people.
What will you do differently next time? I’m already planning, so a big head start, plus building on the relationships I made this time around.

Random Miscellany

I chipped a tooth (ever so slightly) but didn’t have time to fix it with all the travel; I would tell folks that I “”Kept my fund smaller so larger funds can pick up the tab”; My flying routine on longer flights was to wear sweatpants and my green StrictlyVC t-shirt; when I say lucky, I mean it – Haystack only became “institutional” as a fund with 10 days left in my campaign; and with the exception of my shoes, my entire main pitch wardrobe hailed from MTailor, a Fund II investment of mine.

Looking Back On Tech Startups And VC In 2017

Here’s my “Year In Review For Tech VC & Startups, 2017 edition.” For the past few weeks, I’ve jotted down notes on my iPad w/ Pencil, and sort of dreaded the act of writing this given the overall stench of 2017. Yes, there were some bright spots. Focusing now only \in the world of tech startups and the investment firms which fund them, most of the major stories and developments are hard stories, but you’ll also see below many are thankfully moving (even if slowly) in a better, more equitable direction — though the process of getting there is a bumpy road.

The key thread running through the big stories in tech startups and investing in 2017 centers around the increase in three characteristics: 1/ the distribution power conferred to incumbents; 2/ increased global money supply seeking alpha in tech; and 3/ significantly more transparency in the information market.

And, with that warning, I offer to you, the big stories in the startup and investing ecosystem of 2017, written in ascending order of importance and magnitude…

6/ The Facebook Effect On Snap

[Truth be told, I added this in at the end as my friend Adam suggested it. I think he’s right. I’ll keep it brief. Snap went public, which is a noble feat, but then both Instagram and Facebook — two little social networks with quite a bit of market power — copied Snap’s most original product feature: Stories. And then, all of a sudden, we were once again reminded of the power of distribution over all else, and the specific power Facebook wields. While Snap has other woes (such as sitting on inventory of Spectacles), the scope of that FB-style power is reflected in part in the drop of Snap’s shares.]

5/ The Amazon Echo & Alexa Effect

We have one Echo and three Dots around our house now, along with one FireTV Stick. I will never understand how Apple didn’t use AppleTV to get Siri into the home, but Amazon beat everyone to the home market with the best product. Amazon’s speed and might were no match for Google (with Google Home, which will always be at a distribution disadvantage relative to Amazon) nor Apple (with HomePod, which was announced but delayed in production and never shipped). As Google and Apple scramble, Amazon is lapping them with Alexa, more devices, more integrations, and frankly more value per dollar invested. When it comes to voice at home (to start), so far it’s game, set, and match.

4/ The Softbank Effect

In the world of venture capital, Softbank’s massive Vision Fund has come to embody the amount of global money increasingly entering the market. With a $100B debut fund and rumors of a $200B second vintage in the works, Softbank has not been shy about investing large sums into traditionally growth-stage tech startups, as well as companies that are large enough to have gone public years ago. Some notable investments by The Vision Fund to date include ARM, Slack, SoFi, WeWork, and Roivant, among others. And of course, there is the currently-under-negotiation mega-deal to invest in Uber at a substantial discount to its most recent valuation. There also seems to be credible rumors on nearly monthly basis of new investments Softbank is considering.

This all presents interesting challenges and opportunities for the startup ecosystem. On one hand, earlier investors and shareholders could find liquidity faster in a highly illiquid environment. On the other hand, larger investors (especially VC firms, as Sequoia is rumored to be countering with a $5-6B global growth fund) have recognized that Softbank has changed their own exit calculus and ownership models to the point where we could see the traditional Sand Hill firms bulk up even above the current $1B-$1.5B size many have gravitated toward recently.

3/ The Crypto Effect

A year ago, for my “Looking Ahead To 2017” post, my final point started like this: “Digital currencies will be offered as part of a sophisticated investor’s portfolio.” Wow, what an understatement.

Right now, as everyone searches for the next thing, there is little doubt that “crypto” — shorthand slang for the burgeoning global trading market for cryptocurrencies — is the single biggest wave in tech right now. Banks like Morgan Stanley conservatively estimate that in 2017 alone, well over $2B was invested just in funds which aspire to buy, hold, and trade these currencies. Of course, the real number would feel much larger, with the overall “market cap” for cryptocurrencies already at over $0.5T and more funds bulking up their AUM figures as their own holdings appreciate. Recently at the Bullpen Capital annual meeting, the partners shared a well-researched presentation from a variety of sources, conservatively estimating there are over 220 ICO-funded startups, that ICOs have returned 13x (that number will fluctuate, of course), and that overall ICO funding may have surpassed all seed funding during a similar time frame.

We could present 101 plausible reasons as to “why” there’s been a big runup in this sector, such as increasing levels of distrust in institutions, the rise of Ethereum to help developers build decentralized apps (“dApps”), the creation of venues like Coinlist, where consumers can participate in new ICOs, the creation of new investment funds designed specifically to buy, trade, and hold tokens, the fact that traditional VC firms amended their charters to hold tokens as a custodian, the rising popularity of The Breakout Tech Company Of 2017 — Coinbase — in being an onramp to this new world for new investors worldwide, the fact that much of this nascent industry is funding itself with house money, and the increasingly mainstream name recognition of Bitcoin across mass-market audiences such as the NFL, or the announcement by Goldman Sachs of opening a new crypto trading desk, and so forth.

We are in the middle of a fast-paced global, unregulated, hard-to-trace, multiparty crowdfunding game driven by both optimistic speculation and ebullient house money booked during an unprecedented bull market run. At some point, the music will stop — lawsuits could arise in situations like Tezos, which raised an ungodly sum of money through a crowdsale and is now mired in controversy over how those funds are being managed, and regulatory bodies like the SEC and others could step-up activities to protect retail consumers and also better track ledgers for tax collections on gains. Overall, even when the music stops for a bit, there’s no denying that the effect of crypto as a new architecture for designing, building, and incentivizing online behaviors is a major breakthrough and one that will change how many tech startups are built and financed in the future.

2/ The “Tech Backlash” Effect

One could argue this is the #1 meta issue that surfaced in 2017 to a boil. Normally, I would agree, until you will eventually read below. This year, we saw numerous real expressions of distrust of and animosity toward “Big Tech” in ways we haven’t seen before. In 2017, we saw more grumbling about the political heat a company like Amazon may face, as the traditional retail sector is decimated (and its founder owns The Washington Post). We saw more talk about regulating “Big Tech” overall, as companies like Facebook, Google, and a few others have grown even stronger on the back of the web’s and mobile’s unprecedented network effects. More recently, in the forthcoming tax bill, we see a specific tax hit to “blue states” in America where many tech workers reside.

The big, big story (that’s still unfolding) is about how foreign groups (and nations) used U.S.-created and headquartered social media networks as a backdoor for infiltrating the flow of information, especially as it pertained to politics, elections, and online discourse. Hackers were able to create accounts that looked like people, leveraged technologies like automated bots and natural language processing to create fake stories, filtered conversations, and more. The increased transparency around these stories have turned up the scrutiny on tech platforms, especially social networks, and increased calls for their oversight as they know are the main way citizens worldwide get their information. [Some readers may react to this paragraph or entire post as “Fake News!” to which I would respond, “Hey, you may be right.”]

2a/ The “Uber Backlash” Effect

Uber needs its own sub-section. It is hard to overstate what a disaster 2017 was for Uber. We don’t really know the full story. It is all still developing, but if you had asked me a year ago, “Semil, do you think Uber would be a hot, raging inferno of a dumpster fire in 2017, with the CEO and key board member being forced out, with a rash of work misconduct findings, with a lawsuit pitted against Google, with other cities in other countries making moves to regulate and curtail certain company advances, with newly uncovered schemes to have informants at competitors?”, I would have thought you were crazy. But, truth is stranger than fiction these days, and as we seem to learn on a weekly basis (sadly), Uber may actually have so many skeletons in its closets it could severely put a cap on its product growth and company expansion.

1/ The Fowler-Weinstein Effect

While the biggest 2017 trend in tech startups was crypto, to me it wasn’t the biggest story. That honor belongs to the small but important changes happening within the world of tech startups and the groups who invest in them. When I look back on 2017, what I’ll remember is the wide-ranging effects of Susan Fowler’s whistleblower post against her former employer (Uber) and the far-reaching effects from the revelations surrounding and public backlash against Harvey Weinstein, among others. In addition to the overall mess at Uber, other companies like SoFi and UploadVR saw changes as a result of similar allegations.

This also spilled over into the world of VCs, specifically how much the face of the vaunted VC firms are changing as a result of rapidly shifting attitudes — and done with swift action. In 2017, we witnessed a number of high-profile male venture capitalists either removed or forced to resign amid allegations of sexual harassment or misconduct. We also saw some of the most elite VC firms, starting back in 2015 and 2016 a bit, and now picking up steam, recruit females to their GP ranks. So, we see small steps in the right direction, as the topic of diversity and inclusion is increasingly discussed within the tech/startup sector as it pertains to events, panels, investment groups, executive ranks, and more. While gender is beginning to be addressed, the topic of racial diversity still lags behind. This past year saw some real pain, some good, small advances, and a recognition that much more work lies ahead.

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And, there you have it — 2017. Not that pretty. Some bright spots, yes, and I sincerely hope those bright spots will help things improve and move in a better direction from 2018 and beyond. But, mostly we see the effects of having more money and more transparency in the market. My hope is that these forces will eventually lead individuals and groups in the startup world to change for the better, but along the way, we should’ve prepared for a bumpy ride. Later this week, I’ll write a separate post unpacking some of the year’s most notable startups exits, and then share my “Looking Ahead To 2018” post. Thanks for reading and Happy Holidays.

Podcast Holiday Listening 2017

This fall, I wanted to go on a “Podcast Tour” to talk about the new Haystack Fund and also re-engage with one of my favorite mediums, audio. Here’s a quick holiday round-up of all the shows from this fall, with two more set to be released (Origins, by Notation Capital; and Reboot v2, with Jerry Colonna) some time in January. It’s hard to share podcasts socially and people listen in different formats and on different players — I use Overcast for iPhone at 1.5x speed and love it — so here’s a rundown of all the links. If you’re stuck commuting over the holidays and/or need extra help falling asleep for a post-meal nap, listen to one of my interviews at 1.5x speed!

20 Minute VC (released 10/23/17)

The Full Ratchet (released 11/1/17)

The Syndicate (released 10/13/17)

Software Engineering Daily (released 11/9/17)

33Voices (released 12/18)

The Breakout Tech Company Of 2017

For a while, on this blog, I attempted to pick one startup for that year which truly “broke out” of its shell. Dialing back the clock, one could say 2011 was Uber and Airbnb; in 2012, I wrote about Stripe; in 2013, I wrote about Snap; in 2014, I prematurely said there were none but then backtracked when Slack exploded; in 2015, I didn’t write one, and in 2016, my thesis was the big tech incumbents would grow even more powerful from the web’s and mobile’s network effects that startups wouldn’t even have the chance.

Now with 2017 nearing the end, I’m back to the point where I can point to this year’s tech breakout company: Coinbase. I know, it’s likely an obvious pick, but I unpacking “why” is a fun exercise I’ll attempt below.

Right Person(s): Founded by Brian Armstrong and Fred Ehrsam, blending backgrounds in finance, computer science, math, and engineering. Also noteworthy that Armstrong spent time as an early engineer at Airbnb, where he could see how much money the company would spend on Forex with transactions happening worldwide. To grow the company, Brian and Fred recruited and attracted some of the best folks in their space and some of the scrappiest startup builders and execs out there in a dangerously hyper-competitive recruiting environment in the Bay Area.

Right Idea: Initially, the idea to let folks hold Bitcoin in a wallet. And, eventually, the idea morphed into powering buying and selling, and getting real banks to back them up. That idea, coupled with adding Ethereum to broaden the offering, set the company on a course to be a potential kingmaker of tokens in the future.

Right Product: The exchange is the thing. Right now, we know of three ways to make money in this sector. One, you can trade tokens like a hedge fund; two, you can design the outline of a protocol and draft a whitepaper to market an ICO and raise money for yourself from the crowd; or three, you can be the preferred exchange with a banking moat as people buy, hold, and sell worldwide. I like to describe Coinbase as one of the key central nervous systems in this new world

Right Time: Coinbase went through YC in Summer 2012 and raised their Series A from USV in Spring of 2013. While it was a competitive deal, it was not a huge deal in terms of dollars going in, and very few firms had any theses in this space, let alone investment conviction. Fast-forward four years, and with Ethereum and ICOs exploding, Coinbase transformed into one of the world’s most trusted destinations. The company started well before it was “cool” to be in this space and therefore nailed its timing.

Right Market: CRYPTO! Enough said. Well, I can say a bit more… while lots of activity is frothy and could capture the attention of regulators, governments, and class-action lawyers, it is an immutable fact that if thousands of developers worldwide were incentivized to build new protocols to transmit information, and if those models could help rewrite how applications are built, how open source software is used, and a host of other use cases we can only theorize about today, it stands that “cryptocurrencies” can address a growing global market and be worth (if it all works) a multi-trillion dollar market. And if that happens for real, Coinbase will have the mindshare and a massive headstart on others.

The Story Behind My Investment In Perlara

Almost two years ago, I met a founding team during Y Combinator batch. It was in a field I haven’t invested in before, but I have spent time in during a previous life and career. We met for coffee on the Embarcadero, and while my “life sciences lexicon” is quite rusty, I somehow managed to carry on an entire conversation and even (I hope) earned the respect of the founding scientists for being able to recall some of the core elements of why their company, Perlara, had a chance to make a big impact.

What was able to recall from my previous life in the world of life sciences? I remember that while traditional pharmaceutical companies needed to develop drugs to address large markets, a new wave of biotech firms emerged that would be able to more efficiently identify and serve less “popular” afflictions, often referred to as orphaned diseases. Fast-forward to 2016, CRISPR technology began to make headlines, and when I asked Perlara about the connection here, they lit up — we are now in a phase of biopharma where gene editing applied in these methods can help scientists develop cures for with rare disorders.

I asked to make a small investment, and Perlara agreed.

Earlier this week, Perlara announced a large round of funding, which you can read about here and here. While the team has been growing and progressing well, companies like Perlara don’t necessarily follow the funding trajectory we are accustomed to in startupland. Ultimately, Perlara was successful in raising a seed round (where I participated) and significant subsequent investment from the pharma industry (just announced). I can’t underscore how difficult that is to achieve when most dollars are looking to return a quick buck. So, a big congrats to the team, scientists, collaborators, and all the families and friends on PerlQuest journeys for their loved ones.

Perlara was more of a “learning investment” for me to see how the company operates (as a PBC), to see how these companies raise capital, to see what metrics matter, and to support the work of its scientists, which is undeniably huge. Digging a bit deeper, it is very cool to browse Perlara’s site to see the variety of tech startups the company partners with for various business functions, such as Vium, Benchling, and Science Exchange, among others. Perlara had six diseases in its 2017 pipeline which will double in 2018; company headcount will double to 20, adding to what is already an epic team; and the company is projecting $1M revenues from PerlQuests and much more from industry collaborations. That, in effect, validates my investment, as I know the intersection of CRISPR and rare diseases is a place today’s pharma giants will need a play in, but they themselves can’t apply this focus in-house.

I do not foresee myself investing in more life science companies in the future. This was a special case for me, and I am glad Ethan and his team were kind enough to invite me in. I do hope others with more focus in these spaces come into the ecosystem to support the next Perlaras on their journeys, and as you’ll see looking through their site, the results they strive for are painfully tangible.

The Story Behind My Investment In Optimus Ride

About a year ago, thanks to an investor friend who, in this particular case, shall remain nameless (but you know who you are, and thank you!) was kind enough to tip me off about a great team he met on the east coast but one that he couldn’t invest in. Often investors only take referrals from other investors if that introducing investor has invested him- or herself; here, this was a close friend, and it was a very interesting company. I’m glad I took the referral.

That is how I came to meet the team from Boston’s Optimus Ride. This week, Optimus Ride announced a large Series A investment led by Greycroft. You can read more about that news here. And, read this great piece by Xconomy on how Optimus fits into the landscape.

I was lucky to be involved in the seed last year, a round led by friends at NextView and FirstMark. While I couldn’t make it to Boston at the time I needed to decide to invest, fate played a hand as some of the team’s leadership, who hailed from MIT’s faculty, had actually shared lab space with one of my old mentor’s from a previous life — I literally picked up the phone, called my mentor (who is a leader at MIT) and within minutes learned the team was, indeed, top-notch.

While I knew I wanted to invest, getting in was a bit harder. Lee @ NextView and Matt @ FirstMark were nice to vouch for me, but I had to really work the phones with the team to get them comfortable with me. Knowing a MIT professor in common really helped. I also told them that having a west coast investor, even if smaller, would be helpful as they thought about future rounds and company building in what is arguably one of the most active sectors over the last few years. Lucky for me, it worked out, I was able to invest, and happily able to follow into the next round.

For context, I have not made many investments in the autonomous driving space. I have, however, invested “around” the idea of the car — companies like Navdy (heads-up display), or Carmera (V2V communications); or a recent stealth AI/data company in the Valley. I’ve always felt the VC industry has over-tilted after the blockbuster acquisition of Cruise Automation by GM. Since then, we’ve seen a flurry of VC investment in the category, tons of self-driving startups and adjacent tech plays, and even funds solely focused on autonomous driving technology.

While I appreciate the surge of entrepreneurial activity (and investment to support it), it always struck me as out of balance. On the other hand, there is no question the transformation of the automotive industry from machine-driven to technology-driven is upon is. It presents a different challenge for VCs here — very few, if any, of these companies can be independent; few, if any, will IPO; so, they all need to be acquired, so VCs who are investing are essentially betting the consolidating pressures in this industry will reward them for taking this risk.

Despite that, investing in a team like the one behind Optimus doesn’t feel like a risk at all — it feels like a huge opportunity. It is a truly interdisciplinary team of technologists and operators and one that could very well defy my logic above and remain independent, remain in control of their own fate. The interdisciplinary nature of Optimus is, at the end, what distinguishes it — we see today, especially in the Bay Area, many isolated product solutions in this space, but because Optimus is away from the Valley and has these networks, they were able to build the team they wanted to without fear of talent fragmentation. That is working so far, and it’s a theme I’ve been investing against and hope to write more about here.

Finally, of course, congrats to the entire Optimus team, and it will be fun to watch fleets deployed.

Podcast: The Backstory Of Raising Haystack IV (The Full Ratchet)

As my Podcast 2017 Tour continues, Nick Moran from Chicago’s The Full Ratchet was kind enough to have me on his show again a second time. Two years ago, I was a guest on The Full Ratchet discussing the intricacies of how seed-stage companies graduate to institutional Series A rounds. For version 2, in this episode, Nick and I dissect my earlier post on the process (and emotions) of raising a first-time institutional VC fund — I process I tried to capture in this post earlier this year.

The feedback to that post a few weeks ago has been deeper than I had imagined. Folks also listened to Harry Stebbing’s recent pod with me. And, they should listen to this one with Nick, too — Nick’s podcasts are longer (this one is about an hour) and Nick goes through every detail on his notes page. He knows the right questions to ask at every turn, so I’d recommend this new episode…here’s what we discuss…

-Maybe we can start off with how your investment focus has evolved since the last time you joined us.
-What are your thoughts on how seed has split into pre-seed, seed, seed extension, and post seed?
-Are you investing once with a company or reserving for these various stages within seed?
-You just closed fund 3… tell us about the first two funds that set the stage.
-Would you do things differently if you could go back?
-Which raise was the hardest?
-How did the expectations of LPs change from the early funds to the institutional fund?
-What surprised you most about the raise?
-Did you connect w/ prospectives through referrals, cold calls, a combination?
-Walk us through the metrics… how many targets, meetings, avg commitment amt, etc.
-Did you ever think you might not complete the raise?
-What’s the best advice you got on the raise and who’d you get it from?
-In our first interview, you talked about how you couldn’t get a full-time job at a venture firm. I’m sure you’ve had plenty of offers as you’ve built a track record. Did you ever consider making the jump?
-When I sent my fund deck to you, you said “Awesome and looks good. As I always say, the deck matters much less than having capital partners who believe in you” For anyone listening that aspires to raise… talk about what you meant by this comment.

…and especially recommend it if you’re just starting out to invest and/or already have a small fund. When I mentioned I was surprised, it seems like there’s no stop to the rate of new small fund formation. Three years ago, people said the same thing — “How can there be 250 new small VC funds?” And, every year, that question remains the same, with the number going up. By the response to my post, it feels like even more next year. I have been thinking about the gale wind forces driving this trend, and I’ll share a few here below:

1/ Global instability makes the U.S. an attractive place to park money. Money around the world seeks a safe haven, and despite our current troubles here in the U.S., relative to other regions, this country remains a very attractive location to put money to work. That trend has only been increasing in intensity over the past few years.

2/ When foreign money comes to U.S. shores, it often travels west. The money coming in is going to the coasts (another issue, yes), and primarily the Bay Area, which has led to a new kind of local area inflation. It means pre-seed rounds of $1M pre-product, and lots of early investment in new things, lots of talent fragmentation, higher rent, harder recruiting environments, intense competition, etc.

3/ Large, new financial players like hedge funds, banks, and sovereign wealth funds seek to diversify. I don’t want to lump all these folks as their motivations are slightly different, but the Tiger Global’s, the Blackrock’s, and the SWF’s of the world have big asset balances and investing earlier in technology is a good way to diversify. One could argue Softbank’s much-covered Vision Fund is a product large enough to accept checks from major SWFs and give them exposure, essentially picking off the best companies from ever going public and hitting public stock exchanges.

4/ Traditional VC firms may have gotten too large and not planned succession well. Many firms have ballooned from around $200M a decade ago to over $1B per fund now. The nature of those funds and their business models have changed. Larger funds, I believe, will need to be hybrid funds which engage in direct investing, yes, but also fund investing, secondaries, and the like. So, smaller funds are rising to fill that early risk gap with capital that is just seeking alpha.

5/ Founders, at least in the early stages, seem to prefer collecting small checks from operators vs bundled checks from institutions. So, the money is moving where the market is. Let’s see how long it lasts.

 

Haystack is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2018 Semil Shah.

“I write this not for the many, but for you; each of us is enough of an audience for the other.”— Epicurus