Working with many seed-stage companies, a large component of my decision-making and work revolves around being helpful as the company approaches a “Series A investment.” This term can mean different things to different people, so I’ll simply state how I define it — To me, Series A is when a professional, institutional investor (usually at a VC firm) writes a check for 75% or more of a $5M+ round, pricing the equity, converting the notes, and joining the Board of Directors. In theory, it is a long-term commitment from the institution’s point of view, and that VC is likely reserving up to two times the initial investment amount to keep investing in the company if it grows.
From the point of view of a founder, “getting to the Series A” is a big milestone, anchoring deeply in the mind as seed capital is now relatively easy to find. While everyone wants to “get there,” of course, reality is a bit different, and Series A investors are constrained by how many boards they can sit on, and their own partnerships often act as a governor on pacing such that, more or less, VCs are maybe joining 1-2 boards per year. Much has been written about these behaviors, so I’ll just briefly leave this here as context for what I really wanted to convey in this post, which is…
For founders hoping to prepare for a Series A, think of the milestone slightly differently. As an exercise, think of it as “Recruiting a Board Member.” When framed this way, a founder could ask him/herself slightly different questions: Who would I like on my board? What style of engagement do I want, or need? Do I want my board member to have a specific background, or network?
Not many founders have the luxury of choice, I know. But I do see so many founders who are earnestly charging hard at this milestone, and then are surprised when it takes longer, or doesn’t work out the first time — so, rather than thinking of it as a milestone, I’d like more folks to think about it like hiring, like a recruiting event. When trying to recruit a great hire at a company, a startup will prospect and try to win over the heart and mind of a great candidate. But if great people aren’t ultimately joining the company, what could that mean? Or, if a company in that moment can’t recruit a board member, what could that mean about the opportunity?
I wanted to pose these questions because I see a large disconnect here. The founder wants to hit a milestone, raise more money, and keep going — the VC is hoping to be selective, to make a long-term commitment, and to join the board of a company. I am trying to find early-stage founders who one day want to recruit a board member. It’s a slightly different mindset, but one I’ve found to be definitive. I believe if more founders approached this milestone as a recruiting event instead of a financing event, more of them would be more successful at getting to the A and closing it quicker.
After investing in Saildrone a year ago, I tweeted something late at night about meeting founders with “oceanic” ambitions. A friend on Twitter (Jonathan Van) from Texas wrote back, emailed me, and said he’d put a bit of money in this company in Texas that had “oceanic” ambitions, but for space. “Okay?” I thought to myself. He introduced me to Marshall Culpepper.
Marshall and I met for coffee in Palo Alto. I was blown away by the depth of his background — an early employee and major open source contributor at Appcelerator and Jboss, as well as a stint at Mozilla. I knew one of his bosses and called him after, and he cited Marshall as one of the strongest technical contributors he’s ever worked with. Then, Marshall was an early employee at Spire, a VC-backed satellite startup. Aside from his technical acumen, Marshall is also a dreamer about outer space. So, then he went off to build a new, unique product: Kubos.
There’s no way I can credibly detail how uniquely awesome Kubos is, so please read Marshall’s take on it, in his own words. Marshall and his team have been incredibly scrappy to date, having only raised a bit of money previously, and working out of Denton, Texas, far away from the west coast. Initially, I also passed on investing.
I met Marshall, and I liked him, but I didn’t fully understand the space (no pun intended… sort of), so I went off to investigate it. I talked to a bunch of friends who were at space-related companies. I tried to see if some of the larger defense companies would use an open sourced platform like Kubos. Everyone was mostly cool to the idea. Marshall was in Texas. I didn’t “get” the space. Might as well say “no” as politely as I could.
Marshall accepted the “no” like a professional and we continued to email, chat, and became friends. I had a good investor friend visiting the Bay Area, and we were talking about recent deals we’ve done, I remember lamenting to my friend that I am looking for a specific type of person as a founder/entrepreneur, and without realizing it at the time, I cited many of Marshall’s characteristics. As I eventually told my friend about Kubos, he quipped back, surprised: “Wait — and you didn’t invest?”
I pinged Marshall and asked if he’d let me revisit. I did a bit more work and realized there was potential white space both at larger non-space companies (for instance, could Microsoft one day have its own micro-sat constellation? yes) as well as for the newer satellite startups that were popping up around the world. We reconnected and I invested a bit into Kubos. Marshall and the team have been a breeze to work with. And recently, Marshall raised a proper seed round led by Tim Draper, who has some experience investing in space, and firms like GGV Capital, Draper Dragon, and Autochrome.
People will often ask me, “What sectors are you interested in?” or “What kind of deals are you looking for?” I struggle with answering those questions directly, because the real answer is slightly different — I am looking for, I am interested in finding people like Marshall, people who have cross-functional depth in their industries, people who aren’t too worried about dilution, who aren’t worried about what other startups are raising or doing, who are noodling on their craft on a lazy Saturday afternoon because they wouldn’t even know what else to do. That is a decent description of Marshall, so if you know others like him, you know where to send them.
When one of your best friends and seed-stage co-investors texts you about a company “you’ve just got to meet,” that certainly gets my attention. Thanks to that good friend in NYC, I was able to meet Andrew, the CEO of a company called sp0n. Yes, that’s right — sp0n. I have no idea what it means, but it is a real company and I wired my money to them.
Andrew and I clicked right away. I am always on the prowl for a new opportunity, and especially in the consumer space. As I’ve mentioned, it’s been harder for me to get excited about the consumer concepts and networks that have come my way. I am sure I’m missing some good stuff, but I want to make sure what I’m funding either (a) has a path to distribution in a large market; or (b) is a product so unique, I am compelled to see it exist in the world.
Investing in Andrew, sp0n, and its first product — Citizen — is most certainly (b), but I also believe it could be (a). Over the years, you may have noticed that I reference Chris Nolan’s Batman in tweets often. I am a mega-fan of his trilogy. I wrote it about here. And, as I got to know Andrew, I talked about it often. He felt the same way.
I have been investing in a few new companies which are selling software to different levels of government. Traditionally, this is not an attractive customer to go after — long sales cycles, RFP bidding, local politics, and so forth. But, that is changing. I’ll have more to share on this in the coming months, but software built by startups is penetrating different levels of government. On top of this, sadly, we are in an age where crime, especially in our growing cities, is on the local television news, on Twitter, and broadcast on Facebook Live. Tensions among citizens and law enforcement are deep, and this was before 2017 began, not to mention tensions within different bodies of law enforcement, both local and national.
sp0n has now launched the mobile app, Citizen, which you can download and use on iPhone or Android/Google, though note right now, it’s only available for use in NYC. I’m biased, but I’d encourage you check out their video, here. I know that launching in one city is often a way to aggravate other users, but Citizen has a legitimate excuse — their setup requires significant work to get right before a city launch. I can tell you that Andrew and his team are obsessing about getting it right in NYC and have a plan to rollout at the right time. Inside Citizen, NYC residents can get real-time crime alerts around them, browse a newsfeed of incidents, view and/or broadcast live video, and eventually, I can imagine much more. Having watched the NYC “Citizen Network” grow over the past few months, it’s clear there’s a need for this type of product, and I am lucky to have been introduced to Andrew and to be a small part of the ride to see if it can work, city by city, citizen by citizen.
Another day, another mega-acquisition of a technology company — this time, it was the iconic Silicon Valley company, Intel, which shelled out $15B for Israel’s Mobileye (also a public company) in the high stakes battle to win the war in the shift to autonomous vehicles. In the Valley, when a company with “local” investors exits, everyone takes notice because the exits are rare and points on the board is how folks keep score, classy or not. For Mobileye, a company many miles away, it’s investors aren’t as well known here but, my oh my, this is a massive outcome. For all the articles out there, I found this piece in The Wall Street Journal and The Information‘s Amir Efrati’s piece on the deal the most informative.
Here are my quick takeaways from the deal:
1/ Tech Tsunamis Approaching From The Horizon: As Benedict Evans succinctly pointed out, “Intel missed mobile almost entirely and trying to make sure it doesn’t miss the next tech waves.” Those waves go beyond self-driving automobiles and cover many different areas under the umbrella of “robotics.” As Evans’ colleague Chris Dixon tweeted, the larger play for Intel, as exhibited in its other purchases, demonstrates a commitment to bet “on the next computing platforms: self-driving cars (Mobileye), drones & VR/AR (Movidius), deep learning (Nervana).”
2/ Hanging On for an M&A Bailout: One of the local narratives discussed more frequently is the idea that large incumbent and/or non-tech companies will use cash reserves to buy startups. If only it were that easy. Clearly, there is some dislocation between public and private markets, as Mobileye was purchased for nearly 30x forward revenues and at over a 33% premium. Additionally, many of these larger buyers may have even more cash on hand as companies repatriate overseas cash back onshore.
3/ Chips Are Hot: Not only are chips red hot (you’d know this if you follow Lux Capital’s Josh Wolfe on Twitter), the combination of pairing proprietary chips with software has pitted tech giants Intel in a strategic chess match with competitors like NVIDIA (which is widely viewed to have the most dominant position for AI-based chips) and Qualcomm (another mobile giant playing in similar sandboxes). In the case of Mobileye, Intel is investing in the lucrative area of collision avoidance for vehicles (including drones?), a critical part of the “brain” for image detection and autonomy that is or will be required by regulations. Elite car manufacturers like BMW, Audi, and more are already in deep partnerships (obviously) with the new “brain” companies. (Amir’s post and the WSJ links above go into a bit more detail on these matters.)
4/ Platform Shifts At Scale: When new platforms emerge, new ideas have a chance to reach scale, and investors (obviously) pay close attention to follow these trends. Twenty years ago, we witnessed a shift to the web; a decade ago, it was a shift to mobile; and today, founders and investors are placing their bets for the next shifts, whether those be related to areas virtual reality, blockchain infrastructure, or artificial intelligence, among others. We won’t know which of these will win, or how big. What we do know, however, is after GM bought Cruise for over $1B, and after this massive $15B purchase by Intel, that the shift from human-driven cars to automated vehicles is a platform shift so deep and wide, that companies like Intel, among others, believe it will generate upward of $100B over the next two to three decades.
5/ “A Server On Wheels” – that’s Intel’s CEO’s description of the car. This sea change has manifested itself in many ways — generalist technologists are now turning their sights on automotive technology, searching for opportunity; large incumbent companies that manufacture vehicles or are broadly focused on the automotive sector/experience, flush with cash, are actively investing real sums in this new ecosystem, up and down the stack, and even so far into car-based information and entertainment systems; and every investor feels pressure to have some exposure to this shift, investing in all sorts of direct- and adjacent plays around cars to collect road, vehicle, and other key data that will power the brains of the car, or entertain us while computers drive us around.
Earlier this week, Cobalt Robotics came out of stealth mode. The idea behind Cobalt is to create security robots which patrol places of work, like financial institutions, hospitals, data centers, operational plants, and other secure infrastructure. What is today typically done by a mix of humans (security guards) and machines (networked video surveillance) is up for reinvention in the eyes of Cobalt’s founders, Travis and Erik. Within a few minutes of meeting them, I committed to investing on the spot.
Credit to Jake Gibson, who sent me the details on the company one week, and to my friends at Bloomberg BETA who pushed for me and led the deal. I immediately reached out to Travis, set up a meeting within 48 hours, and was (I think) able to be his last meeting on that Friday afternoon, 3pm start time, I think. As the meeting unfolded, and I knew I wanted to invest, I had to figure out if I could get into the deal, and how. I made a few calls that evening, and then sent a note to Travis and Erik that I’d like to be involved. But, I had only just met them, and we didn’t have time to bond or even talk about how I like to work, and so forth.
So, I resorted to another tactic — one of many examples that demonstrate how much portfolio founders end up helping their investors on other investment opportunities. By the time I met Travis and Erik at Cobalt, I had already made a small handful of hardware+SaaS investments, so I pinged all of those founders on a Friday night and begged them to write to Travis and Erik about their experiences with me. In a few days, I got a note from Travis to cease those operations. I was in.
Since then, it’s been easy to work with Erik and Travis. With their backgrounds from SpaceX and GoogleX, they largely wanted to dive into a hole to do their thing, to get lost in the development of this robot. Credit to them, as well, for being hyper-aggressive about building a customer pipeline and rifling through my contacts for it; as well as wanting to understands the hurdles they’d need to clear before interacting with the large funds for an bigger round. Travis called me about this so many months in advance, I was dumbfounded and wished more would do the same.
Now out of stealth and in the market, more challenges lay ahead for Cobalt — more competition, more of a fight to win customers, and more of a battle to bring companies to their vision of the future of security. I am fortunate to get a chance to learn from Travis and Erik, and to become friends with them as well.
Earlier this month, Connie Loizos of StrictlyVC and TechCrunch gave me the opportunity to sit down with Brad Feld from Foundry Group at her latest “Insider Series” event. I love these events because everyone attending is genuinely interested in investing in startups and everyone has a genuine desire to learn from others on how to improve, how to get better. And, who better than to learn from someone like Brad? You can see a video of our chat above. I focused our talk on two categories — (1) advice for people just getting into the game of investing in startups (covering branding, stage focus, and more) and (2) drawing out lessons from Foundry’s first decade in existence. It’s hard to meet a newer investor in the ecosystem who hasn’t just met Brad, but also received direct and meaningful help from him. My favorite part of our chat is when we talked about competing for a Series A investment against firms where he has friends — and I loved his answer. More or less, he said that Foundry wants the founder to pick, and is ultimately happy for them whether they pick Foundry or a friend/rival firm. It’s a subtle, deep, zen-like approach that I still need to think and reflect on. So, thanks to Brad for making the time for all of us, and thanks to Connie for the opportunity!
Edited Transcript (not full)
@semil: We have only a little bit of time. I know there are a lot of people here who want to meet Brad. So, excuse me, I’m going to talk really fast and get to some audience questions. Can you handle quick fire?
@bfeld: Let’s go.
@semil: Okay. on the Snap IPO itself, what it does it mean for the tech industry, investing, and is the consumer window closing?
@bfeld: I am not a Snapchat user because I’m too old. I mean I have one, but I don’t have this on my phone. I don’t have much emotional connection to the company. I think it’s really good that it’s going public, and I think more… I’m sorry. But other frameworks or school of thought is I think more IPOs are good. I don’t really think there’s a window per se of consumer, not consumer. This is the endless discussion. “Oh, there’s no more opportunity to do x ever again in the history of mankind.”
@semil: Fred wrote that a few days ago in not such a direct way, but he all but – in my reading of it – closed the door on Consumer Internet, Digital Media.
@bfeld: Well, so let’s define what Consumer Internet, Digital Media is. Will there ever be a new product that is ubiquitously, used from a consumer perspective, that is in the universe today that we’re thinking about? Absolutely. And is it something we haven’t thought about yet today? Absolutely. Is the ability to raise a bunch of money on a relatively smaller user base in a perspective view of the future available to people? Probably not. So, the shift is, instead of it being a whole bunch of people trying to get money into stuff, and a whole bunch of things getting created, focusing more clearly on what you’re doing as an entrepreneur that’s playing ahead of the next wave of what’s going on. And we go through this over and over again. I mean, every single layer of whatever the new hot, trendiest thing is… 4 years ago, or 5 years ago, I was on a panel that some other publication – not to be named – and the panel is about Big Data, right?
@semil: I remember that.
@bfeld: The headline that, of course, got printed was Big Data is bulls**t. My comment was is that calling Big Data five years ago is going to be microscopic data in 20 years. So, the dynamics of all these things are continually changing and gets renewed. The idea that there’s somehow a window that’s closed is doing a disservice to anyone who has a creative vision about the future. The notion is the way that things have been funded for the last five years and the opportunity space that exists may not exist going forward. But that doesn’t mean the next things aren’t going to be creative.
@semil: In this current boom cycle over the last seven/eight years, have VCs in general been too friendly?
@bfeld: No. There’s two different pieces of friendly. Friendly piece #1 is warm, cuddly teddy bear. And most VCs who are warm, cuddly bears are actually warm, cuddly polar bears, which means that they’re really wonderful until something goes wrong, and then don’t **** with them. The other version of friendly is passive about dealing with terms, and about the only one setting expectations at some point in time in the context of companies. This phrase that’s maybe 10 years old now, founder-friendly, it’s like a problematic cliché. What does it actually mean to be founder-friendly?
The far extreme of that would be a phrase I use all the time, which is, “Give first,” and this idea that you want to enter into a relationships non-transactionally. You put energy into something – it’s not altruism – you expect to get something back. You just don’t know when, from whom, over what time period.
The extreme case of ‘founder-friendly’ would be, “Hey, here’s 5 million bucks, no contract, no nothing, and send me back whenever.” Obviously that’s not how it works. You get this marketing illusion of what founder-friendly is as a way to obfuscate what the true character of the people are. My advice to entrepreneurs is to recognizes that it’s not a situation that’s generic. The archetype of VCs is not a singular archetype. There’s not a founder-friendly VC — there’s a whole bunch of different personalities in the context of where they’re investing, how they behave, how they interact with you, that defines it. My view is on the dimension that I care about, which is my job as a VC is to help you win period. And as long as I support the person running the company, I work for you. I don’t think VCs are far from that end of the spectrum.
@semil: There’s a lot of chatter about non-Bay Area / non-tech companies buying tech startups as sort of a bail out, if you will, or reinvention. Do you think a lot of that is chatter or do you think we’ll see more of that over the next few year?
@bfeld: Big industrial companies buying tech companies for way too much money because they don’t know what else to do? Yeah. In each cycle, and the whole world that we’re living around is in cycles, and it doesn’t matter what that cycle is doing and whether it’s sloping up or sloping down. You have big movements that are directional. Those big movements, when they happen, are often happening after it’s too late to actually have the appropriate impact of it.
I’ve been doing this for 30 years – I’ve been investing for 20 years – and there are continuous cycles of non-technology companies entering into the world of trying to buy technology companies, going back well before I started even my first company, and a small number of those companies extract really significant value out of that because they buy at the right time, when they occur, when they’re able to do something with it.
And, then a whole bunch of companies don’t get the value for their investment. It will depend on which category, right? You could talk about the auto industry, you could talk about the consumer products industry, you could talk about retail. I think there are different phases of the cycles. They are doing different things. They’re spending different money for different reasons, all of them chasing innovation.
The idea that chasing innovation and creating innovation within their companies, doing it in a way that is acquisition-only, is kind of nonsensical. It’s a strategy. The strategy we’re using at Techstars when we partner with large companies and build accelerator programs, not for the large companies, but for companies that are building things around the ecosystems of those large companies. It’s a very inexpensive way versus spending capital and buying a team of people that’s effectively a startup and run your product. So, all of those things can work and all of those things can fail. It happens over and over again.
If you’re an entrepreneur and you’re trying to time that, you will get f****d. And, if you’re an investor and you’re relying on that, from an investment perspective, it won’t work. You will either get lucky or you won’t. If you get lucky, that will feel good. You’ll start to believe that that’s an extrapolated trend and then the cycle will change on you again.
@semil: Say you’re entering the world of startup investing today, you’re managing a small fund, medium, or part of a larger fund, what would your advice have been let’s say 10, 15 years ago versus now in 2017?
@bfeld: My advice probably 10 or 15 years ago would have been irrelevant, because I don’t think I had enough time doing that. If you go back 15 years ago, I was in the middle of working through one of the biggest sh*t shows that got created in the venture business, which was the collapse of the Internet bubble, and I was part of a firm called Mobius which grew from four people to 70 people in three years and raised almost $2 billion over that period of time, and had one awesome fund, one terrible fund, and one fund that depending on what happens might make some money.
My horrifying year was 2001, where everything fell apart. If I wind the clock back 15 years, I don’t know that I would have had good advice. Even 10 years, which was when we started Foundry Group in 2007, we started Techstars in 2006, I had a bunch of deeply held beliefs, frame of reference, things that I had been involved in that I had done wrong, or that I had participated in that had been done wrong. The younger Brad would have had probably some opinions and hypotheses, but wouldn’t have been able to give advice.
Interestingly, one thing that I do feel like I could give advice on is how I went from being an entrepreneur to angel to VC. And the way I did that was deliberately from entrepreneur to angel, I sold my first company, and I took almost all of the money I made… I sold it in 1993, made a couple of million bucks, bought a house, and then took all the rest of the money, except $100,000, and invested in 40 companies over three years, $25,000 to $50,000 at a time. In ’94 and ’96, particularly a good time to be investing in internet startups.
@semil: But you put your own capital risk. You didn’t seek other people’s money.
@bfeld: I’m now an angel. That’s my money. This is a mistake. I then started working with this very large organization called Softbank, a Japanese company, had a few people in the U.S. that were making investments, and they didn’t have a big team in the U.S., so they leveraged the U.S. team by having some affiliates. For those of you who studied history, there were me, Fred Wilson, Jerry Colonna, who became Fred Wilson’s partner at Flatiron, and Rich Levandov, who is now a partner at a firm called Avalon. We were the affiliates. Softbank was investing tons of money really fast, we were all very busy doing deals. Softbank then ran out of money, and the four of us started what became Mobius Venture Capital, originally called Softbank Venture Capital.
The four of us were accidental partners. It was not a deliberate choice.It was a reaction to a moment in time, a lot of stuff happening, us working together, and three of the four of them worked at Softbank. But then we created a venture partnership and we didn’t do the work of really creating a firm basis for what we then grew very, very quickly, and the predictable thing happened. So, the advice I would give is really simple, is to be deliberate. And this is especially true in this environment where it’s relatively easy to raise a very small fund, it is harder to raise the next level fund, and then it’s harder, again, to turn that into something that’s more than a single partner, that’s sort of scale up from angel. And if you look at the 500 or so funds that are in that cycle right now, an awful lot of them are not going to be successful. And so as both investors and entrepreneurs, the idea that it all just continually goes up is a mistake. So, this notion of being deliberate gives you a starting point for deciding what you’re going to do over a very long period of time.
@semil: On that note of proliferation of seed funds, is there any more room for more funds, either geographically, sector-based in the U.S.? Clearly there are going to be more funds started, but what’s kind of the end game?
@bfeld: I don’t think that supply of capital is the problem, especially globally. There’s always a supply-demand imbalance no matter where you are, no matter what time we’re at. Generally speaking, the only layer of capital that a particular geography can impact is the seed stage. If you’re in – pick any city – and you’re trying to impact your city, as part of the city, whether you’re an entrepreneur, investor, or government, or something else, your goals should be focused on that seed stage. Because pretty much every city in the world there is a bunch of rich people, and they give money to things like museums, and symphonies, and whatever. Those rich people could give the money to startups instead, and at least under the current tax code, they get the same tax deduction if the startup fails that they get if they give it to a museum. So, it’s just think about it as for-profit philanthropy. The worst case is that it turns into something and they get 10, 15, 20, 100 times their money. But they’re building the economic fabric of that community. So, that layer could be impacted. The growth layer, once you got a business that’s working, that money will travel anywhere. Then sort of $2m to $20m million financing, it turns out that’s a b*tch everywhere, including here. There’s never too much of that even here. And the challenge of that later is really difficult.
@semil: And that’s a function of fund size, right?
@bfeld: That’s quite a function of a lot of things, right? You have a place where… I’m going to say this carefully. There’s an enormous amount of work at the whole cycle around investing. The work at each stage is very different. When you’re at the seed stage versus you’re at that $2m to $20m million stage, and then you’re at the growth stage, getting good at doing that work in the $2m to $20m million stage, it’s really hard. It doesn’t necessarily translate, if you’re really great as a seed investor, to all of a sudden being really great at that stage (Series A, etc). And if you’re a growth investor, almost by definition, you’re probably not going to be really good at that stage (Series A) because the characteristics are so different. So, there’s a lack of supply of people who are really good at it, and because of that, in the short term you might be able to have a surplus of capital at that stage, but in the long term the capital is going to go to returns. So if you raise capital at that stage and you can’t get returns, you’re not going to raise future capital. Or you’re going to realize you’re not good at that stage and you’re going to move up or down on the spectrum side. I want to be careful because I don’t want it to sound like, “Oh yes, there’s seven good people and there’s a whole bunch of shitty people.” It is probably the place (Series A) where there’s a biggest constraint of capability.
@semil: Let me spit that back into another way. Are you saying there are funds and they’re composed of managers who have the skills, capabilities, backgrounds to handle writing a $2M to $20M check, but that also have a fund size that allows them to do that?
@bfeld: Yes, that’s right. If you have a very, very large fund, if you have a billion dollar or more fund, it’s very hard to write checks of that size. We experienced that in Mobius. And, it’s two things: one it’s just hard to do the velocity of deals; the other is cognitive dissonance. I remember so vividly that moment when I went home at the end of the day and I realized that I had have massive cognitive distance. And it’s when somebody said, “Oh, it’s only $5 million. Let’s just do it.” And everybody said, “Okay, it’s only $5 million. No big deal.” For me, as a startup entrepreneur who raised no money, my first company was self-funded, $5 million?? What are you talking about? But I participated in that. The cognitive dissonance was I’m like, “Yeah. Okay whatever.” I’m like, “Wait, wait, wait!” Right? So, you lose sight of it as the fund scales up because it’s just incredible. By the way, $200 million fund the equivalent of that is, “Oh, it’s only $1 million dollars.” And if you’re really good, you make a deliberate decision across several million dollars.
@semil: For Foundry Group, I know that fund size typically has been $225 million. Has there been the same number of core investments in each of the vintages?
@bfeld: Yes, each fund has about 30 companies, plus or minus one. I think, 28 to 31. And each fund that we’ve done we’ve invested over three years, again plus or minus a quarter. We do not have a consistent pace, so we like to say we do about 10 investments, 10 new investments a year, but it’s not one a month. We’ll do a whole bunch in January, and February we’ll look at each other and say, “I’m out for a while.” Somebody will see something and they are back at it in May again. So, it’s not that we’re too busy. It’s just sort of a notion of it’s lumpy based on where our interest and proclivities are. We’re not trying to match against an allocation. We’re trying to get paid. Wed had one year where we did 14 investments, and at our annual meeting, at our advisory board, we had a couple of very vocal investors. One of them is a partner of ours now, Lindel, who is a large investor. Lindel said, basically in the advisory board meeting the equivalent of, “Will you guys slow the f**k down? You said 10; you did 14. You’re going to hurt yourself.” Not that you’re going to get bad returns, not that you’ve done bad investments. You don’t have to do… this fast is not good for you, not good for your soul.”
@semil: New people entering the VC world, how would you advise them to create a brand and attract deal flow today? Could someone just starting and maybe they have an angel portfolio?
@bfeld: I’m going to separate attracting a deal far from building a brand. Attracting deal flow is a function of knowing what you like, who you like, and how you like, and then spending a lot of time doing those things. And the reason that’s so important is that if you spend your time doing those things, and you’re aligned with what you like, how you like, who you like, you nourish yourself.
The effort of getting started and finding deal flow is really hard. It’s very easy to find people that want to raise money. It’s certainly hard to find things that are worth investing in. And so, you have to be doing it with essentially whatever you can configure in your favor when you’re just starting out. I think that the idea of you have a really good network, and your network just brings you stuff, well two things. One is your network runs out of things at some pace, but it never brings you everything. It doesn’t filter. If you say “No” to certain things, your network stops bringing you things. If you say “Yes” to everything, you’re becoming an investor. It’s sort of figuring how to build that feedback loop.
The brand is extremely personal, because I’ve seen seed investors be successful who knowing those who they are, other than the companies they invest in, and they’re very not visible. Then there’s people like you who everybody knows who they are. So, you put a lot of effort into writing and talking about your ideas and getting known. I think that’s good. You could be deliberate about it, very disciplined, or you can let it be your personality. My view is that you do it as your personality, you’re very much you.
Now, lastly I’ll say about building a brand is that all the bulls**t marketing stuff doesn’t work — words like “be authentic, be transparent.” Words that we’ve overused to be meaningless… That really just means do and be yourself in the context of how you’re interacting with people, and let your brain, after whatever you want it to be, emerge from that, and people will sort it to people who are attracted to you and people who are not attracted to you. And that’s okay in this world because the goals shouldn’t be that you’re trying to invest in every single company. The goal is that every time you write a check you think it could be a great company.
@semil: Let’s assume for a second that we’re close to, or at some point, there will be a down cycle. I think a lot of people myself included, haven’t actually seen it…
@bfeld: There’s no way Donald Trump is going to be elected president.
@semil: And so, at some point it will happen. Myself included, we’ve read about it, we haven’t seen it. How do the LPs and VCs behave in the cycles that you’ve seen when things have changed very quickly?
@bfeld: Well, it’s a combination of overreaction and total denial. So, those two things happen simultaneously. And we actually have a pretty good taste of it in Q1 of last year. There was a two-month period when the the public markets went down. All of the later stage, hedge fund growth capital at very high prices, those guys stopped playing, the crossover guys stopped playing. All of a sudden, you had these companies with $5 million-a-month burn rates that were counting on raising it in the next round. For a two-month period, the world was going to end, and then it didn’t.
@semil: And they were huge, multiple billion dollar funds raised in Q1 as well.
@bfeld: Well Q1 of 2016, the first half of last year was the most money ever raised. It’s a good point. You have a dislocation of activity based on time. Anybody here who played the MIT Beer Game? Nobody, I must be on the West Coast.
@semil: Looks like there’s one person.
@bfeld: Yeah. Did you go to MIT? There’s a very famous game from the 1980s at MIT, which is called the Beer Game, and it’s a four-stage… it’s a game that everybody that goes to business school plays, and it’s a four-stage supply/demand, sort of supply chain game. One end of the spectrum is the retail purchase, and the other end of the spectrum is the people making the hops or whatever. And there’s four steps, and you have demand that raises you on the front-end. Each turn up serves one, and know what the other ones are. You think it’s a 50-turn game, and so you sort of build inventory and do things as though it’s a 50-turn game, and it ends on a random turn. It could end at 21 turns, it could end at 37 turns, and it’s amazing. No matter what people do, the same kind of behavior occurs, which is that when the demand is high you create an over-production cycle that has time lack, that’s roughly a length of the supply chain. It’s roughly a four-turn lag.
So, if you’re playing it optimally, take a quarter, so four quarters behind what’s happening. Now, you got all these VC funds that have tons of money, and everybody is saying that the world is ending. Who does that benefit? It actually benefits the VC funds, because the entrepreneurs they all want to raise money on terms that they can raise money on because they’re afraid they’re going to run out of money.
Or maybe it doesn’t benefit the VC firms because the people who have the money are not the ones that were the early stage investors. So all of a sudden, the early stage investors are getting capital piled on. It’s not consistent, and so it’s holding these two notions together.
The challenge is the denial dominates. You want to hope it’s not going to suck, and you sort of push off your behavior longer. And what happened at the beginning of last year, a lot of companies slowed their growth, slowed their hiring rates. A lot of companies lowered their burn rates. Some companies raised money opportunistically. A lot of people just sort of focused on their business. And this year, a lot of those companies, many of them are having very shallow growth in years.
Interestingly, if you push the denial out long enough, and the problem stays, so the problem that we had last year continues out, that they had in the first two months last year continues after 12 months, all of a sudden you start to have structural problems, and then you have this massive overreaction. Then all of a sudden, everybody turns upside down and stops doing something. So, it’s interesting to reflect back on 2000. I think 2000 had an extraordinary amount of venture capital raised some of you probably know. But at the time, it was like that was a peak amount, and that was really the signal of the oversupply of capital.
Now, I think there’s a different dynamic going on this time around, both in terms of the globalization of the activity, the amount of activity democratization of innovation, so it’s not just geographically centered. But you had the same kind of problem, which is that you will have an oversupply in certain stages of whatever, and you will have a macro dynamic that somehow impacts that. And ultimately, you always have plenty of tears. The question is whether when it is painful for whatever period of time it is painful, you have the fortitude to actually keep building.
Last comment for our people. Does anybody remember 2008/2009? Wasn’t that supposed to be the end of the universe, the end of our entire financial systems? Startups didn’t even notice it. But for startups, they were just starting to emerge again. So, it’s so interesting how as humans we calibrate our cycles. You’ve never been through a downturn, but anywhere it just wasn’t really a downturn that directly impacted you because the world you were living in wasn’t the one that had this massive downturn.
[Unfortunately, we weren’t able to record the last bits of the chat, where Brad and I talked about how Foundry “competes” for deals, and what they’re planning on for Foundry Next. Sorry about that. Also, the audience members asked Brad some personal questions, and I must say, even I was surprised by Brad’s answers — very deep and profound. Perhaps for another fireside chat!]
How many years now — three? I had to check my back catalog, and lo and behold, I just wrapped up my third Upfront Summit. Every year, it’s an absolute blast, and each year becomes more memorable than the last. After two full days on the ground in downtown LA, hours of fascinating content, a who’s who of lobby conversations, celebrity sightings and conversations, and much more, I will now try to follow up my 2015 recap and 2016 recap with a 2017 version. A brief disclaimer — this will be written from an investor’s perspective, so will not aim to capture the entire conference and content itself, which is huge.
1/ The Four T’s Permeated Nearly Every Discussion – Tech, Trump, Trade, and Travel: The Upfront Summit is a technology conference, put on by a VC firm (thank you everyone at Upfront!), and now with three visits under my belt, it has been amazing to see how this event has grown and morphed into a national event. Last night as the Summit closed and I was having drinks with Greg from Upfront, he asked, “so, what did you think?” What I told him is that this is likely the preeminent “gateway” conference for a high concentration of influential pistons from within the technology startup world — LPs, who supply the capital; VCs, who allocate it; founders, who use it to create value; and the Press, who cover all the ups and down — to be in the same place for 48-72 hours, debate ideas, share deal flow, and hang out more naturally, especially for those who escape the Bay Area’s growing echo chamber. The Summit feels like a gateway because it isn’t just about technology, and that was evident from the carefully-selected programming, ranging from issues around mental health, failure in business, and some of the uncomfortable truths which have dominated the news for the past few months.
So, we have tech. Most everyone would talk about the new Administration and our new President, too, naturally. Not every panel, but it felt like nearly half of every conversation touched on the new world we all live in. Tech and politics seeped into the entire event. So, too, did the subjects of trade, which certainly affect many investors and startups, as well as restrictions placed on travel, and the free flow of ideas and people. Tech, Trump, Trade, and Travel, it was on everyone’s mind and permeated nearly every inch of panel conversations (not all) and off-stage, as well. The conference programmers did an outstanding job making this event much more than just tech — it was about how the tech industry interacts with society, from mental health, to fake news, to online bullying, and so forth. I’m sure more folks will be writing about this over the next few days.
2/ What’s On LPs Minds? There are only a few events where a vibrant network of LPs and GPs mingle for days, and Upfront Summit is outstanding in this regard. I don’t have years of experience under my belt here, but I do observe some of the changes year to year since attending. First, most LPs don’t seem to care about the pomp or headlines around markups in their fund’s portfolios — they go right into wanting to know the underlying details of the companies in question. Second, most LPs generally feel reluctant to add a new manager because their plates are full, and in fact, some have cut their own portfolio, even where performance was solid, in order to concentrate their portfolio more. Third, many who rushed to back spinouts over the past 5-7 years, backing Funds I and II, are now coming up on a decision for Fund III — if notable exits take longer or continue to be one-offs, it could mean things open up a bit for new managers to slot in.
And fourth, the biggest item I heard discussed, both on stage but mostly off stage, deserves it’s own section in this post….
3/ Geographic and Inflationary Stress On The Traditional Venture Model:
This is a tale of two — or many — cities. Many Bay Area investors joke during the Summit they want to move to LA, but I think quite a few mean it. I feel it every time I go down there. Maybe this is for another post, as I need to digest it more, but the variety feels even more expansive than what can find living in New York City. Again, this is for another post….
In chatting with many LPs, this was the first year where tons of them were notably curious and poking around about “how to invest in L.A.” It wasn’t a question of “Should we?” but rather, “How should we?” The region is so large, and with more people moving to the state and area, it’s not far-fetched to think there will be an explosion of LA-focused micro-funds like the Bay Area. A small fund covering the Pasadena area can’t also cover Venice, and vice versa. On the heels of a potential Snap IPO, new liquidity, more media attention, and LA becoming a multi-industry town, the ingredients seem to be in place for the next generation of creatives to make cool things. From the LP POV, looking over a 10-20 year horizon, the region feels extremely ripe and vibrant compared to every other region, including for some, the Bay Area.
Let me break it down…
As you may have noticed on this blog, I wrote almost a year ago that venture is a hyperlocal game, and that when a large chunk of the VC business model is predicated on exits, and most exits are driven by local firms, and most firms here have a history of making large acquisitions, it can be easy to think of the Bay Area as the only game in town.
Of course, that is no longer the case in the same way. Sure, the Valley exceeds on the metrics many measure, but with so much money in the ecosystem, so many new companies, rising local inflation for labor, office space, and the cost of mobility, valuations have gone up while ownership for most funds (not all) has decreased — it all puts a tremendous strain on the traditional VC model. Now, no one needs to shed a tear about that, and it’s partly why new models like Y Combinator, First Round, and AngelList have been able to thrive as innovators.
But…the money behind the money, the LPs, they care about this. They want active managers for their capital in different verticals and different geographies, and they want them to eventually have some decent level of ownership in the companies they allocate capital to. That’s their job, right? In conversation this past week, many expressed real concern about the concentration of money tied up in the Bay Area. As valuations rise, and the cost of living (which managers may need for living expenses) rises in step, it puts a big strain on the traditional model.
There are other creative solutions. There are investors in the Bay Area who have stayed disciplined and grown their funds size carefully; many will now get on a plane to find a deal at a more attractive price “out of market”; and many are more than happy to push back on price and negotiate a deal rather than just have a one-sided marketplace. These tactics will help reward the folks who execute on these types of creative solutions successfully.
In aggregate, however, we may be on a path where a new model has to emerge to make it work. It could already exist with AngelList and their infrastructure to handle fund management; it could be micro-regional funds within the Bay Area itself, which is already starting to happen as I can name a few (and I’m sure more new ones on the way). Where this all sorts out, I do not know. But, on a macro level, it is on LPs’ minds, that’s for sure, and while they will continue to keep investing in the Bay Area (no question), there’s healthy skepticism regarding just how brutally concentrated the rewards (like AppDynamics getting snatched up by Cisco in an all-cash deal) could be over the next 5-10 years. The rest of the country is wide open, though — more and more LPs seem to be open to a regional “bet” here and there, are certainly open to vertical-specific funds which have GPs with the right industry contacts. The “spillover” from the Bay Area to the rest of the country will be fascinating to see unfold — and perhaps it is also part of the solution.
It’s like a trick play in sports, like a flea flicker, or fake field goal kick, or a surprise bunt and suicide squeeze — the list goes on and on, but for AppDynamics, the dramatic sports analogies are plentiful. Set to IPO this week and begin trading at or slightly below its last private valuation price, AppDynamics was just scooped up by Cisco in a $3.7B transaction. Let’s quickly unpack the key takeaways from the deal:
1/ A success 10 years in the making: The company announced its initial round of VC funding nearly nine years ago, April 2008 to be exact (link to press release). If we assume that both Greylock and Lightspeed split the round, and not factoring in any dilution or clauses, and if we assumed a $30M valuation at that time for the company on the high end, on a gross basis this would represent nearly a 123x gross multiple on that round. (In fact, according to CNBC’s Ari Levy — a darn good reporter — the VCs above each own about 21% of the company, presenting a $770M return for each, presumably.)
2/ Enterprise outcomes scaling: Many observers will comment that not only are there not many relatively new tech companies which have truly scaled like Google, Facebook, Amazon, etc., on the enterprise and B2B side, we have Oracle, LinkedIn, Workday (the last two as Greylock wins), and a few others, but not many that get into rarified air of having a multibillion dollar outcome that sustains. Given that trading for AppDynamics on the public exchange wouldn’t have been predictable, this allows investors to cash out immediately without waiting for the 6-month lockup and also juices employees’ holdings significantly.
3/ Cisco transforming before our eyes: Cisco is over 30 years old, a huge $150B company built around network architecture. Now with AppDynamics and their team, Cisco can offer its customers richer data and deeper business insights as the company transitions from a network and hardware centric company toward more software-defined (and, read: recurring SaaS and cloud) service and delivery models. Recall that just six months ago, Cisco laid off 5,500 workers (about 7% of its workforce) in an attempt to shed costs, free up cash, and reposition the company to take advantage of a software- and cloud-driven architecture.
4/ Another benchmark for SaaS founders/VCs: A hot early-stage SaaS deal can escalate in price quickly. For example, a large VC firm which invests in a hot SaaS company at a $300M post-money valuation may be hoping it turns into the 10x outcome like AppDynamics, but those are rare. Let’s now consider that according to their S-1 filing, the company boasted just under 2000 customers, many from the Fortune 500, and top line revenues of about $150M last year, so the public market might have valued them at 10-12x revenues, whereas the private market nearly doubled that implied value by being able to ingest the team, tech, and distribution advantage it has from its current market foothold. Like any big priced outcome, we should expect SaaS VCs to use this as a data point to both justify paying up for a great team and tech but also used to justify staying away from high-priced deals which don’t show a similar path.
5/ “The Art of The Deal:” This is the juiciest part of the story, to know how the deal went down. I wish I did know, but my guess would be that the execs and board members who are supremely networked at the highest levels of the Valley were able to run a dual-track process to position the company for IPO while also courting suitors (like Cisco, which boasts over $70B of cash on its balance sheet) to take a look now before it would become costlier and more of a hassle to acquire a public company. Just like LinkedIn opted to take the cash and live inside a larger web scale platform, AppDynamics made the call to take the same approach, taking what is presumably a majority-cash offer as a better deal than the pomp of ringing the NASDAQ bell later this week.
This begs the question — aside from true outliers like Airbnb, Uber, Snap, etc., will most (not all) companies that actually IPO be adversely-selected? An open question for debate as 2017 unfolds, but to the folks who built AppDynamics up over the last decade and the folks who crafted the art in this deal — well played, folks, well played.
Wrapping up my first CES/Vegas retreat, I boarded the plane to check Twitter to see — lo and behold — that Trello had been acquired by Atlassian for $425M in a great, quick early-stage venture outcome. There’s quite a bit to unpack here, so I’ll just leave a few thoughts here but would love to hear more from the crowd about the implications of this move:
1/ Accidental Happenings and Side Projects: I do not mean to suggest Trello’s success and outcome is accidental, but rather that it doesn’t appear (from afar) that Trello had a normal birth or childhood. Trello was created inside Fog Creek Software, co-founded by Joel Spolsky, and then spun out in 2014 and funded by a mix of seed investors and early-stage VCs. Spolsky became CEO of Stack Exchange and was Chairman of Trello, and I believe another Fog Creek founder ran Trello. As it started to grow, someone else ran Fog Creek. This may be fodder for another post at a later date, as the genesis of this outcome seems both accidental and also a bit looser, more creative than the traditional business rigidity with which we read about in countless startup “how-to” blogs. (Fun update: Per my friend, Sean Rose: “when Trello was still part of Fog Creek, it was funded via Fog Creek employees opting to have their bonuses go to the project.”)
2/ Cross-Platform Architecture, Mobile Card Format, and Business Integrations: Slack launched cross-platform from day one, on web and mobile. I am not exactly sure of Trello’s history — it seems if they were web-first, mobile responsive, and then launched for iOS. Additionally, the interaction model of Trello featured boards (like Pinterest), which displayed nicely as cards in a mobile app. Finally, the Trello team had quietly built many storage and business process integrations into their offering, giving some of them away as a hook and charging larger teams for the privilege to stack them up. (Trello also didn’t have thousands of integrations, but enough to make customers happy — more integrations likely doesn’t mean they’re all useful.)
3/ Consumerization of Enterprise: This has been an “eye-rolling” buzzword, but we have to accept it is an apt descriptor. Following the success of prosumer designs in apps like Slack, Asana, Wunderlist, and others (more on this below), Trello’s design delivers a lightweight experience to users with enough infrastructure and power to fuel large teams across many different platforms. Trello simply feels like a consumer product, something that may have been designed inside Google or Facebook — but much better, cleander.
4/ Capital Efficiency: Assuming Crunchbase and my sources are correct, Trello is (relatively) a modern case study in capital efficiency. Having only raised about ~$10M, Trello seemed to not only grow its team (over 100) and its user base (19M+) quickly, they also marketed a three-tier freemium product that charged more to small businesses and even more for enterprise customers. In VC-math terms, Trello likely produced a 8.5x realized (mostly in cash) exit for its investor in less than three (3) years (which positively impacts IRR) and didn’t have to raise round after round of capital. Compared to some of its peer products like Asana and Wunderlist, among others, Trello has been relatively capital efficient relative to its exit value. (A reader notes that it’s spinout from Fog Creek also adds to its capital efficiency.)
5/ Enterprise SaaS consolidation: For years now, we have witnessed different varieties of M&A across enterprise SaaS, whether it’s an incumbent like Salesforce scooping up new products or private equity shops buying small-cap public companies, there’s more and more pressure in the environment for the larger companies to expand their offerings to grow, as well as financial incentives for buyouts led by managers who can profit from creatively rolling-up disparate end-point solutions. In a world where collaborative products like Slack or Facebook @ Work or Microsoft Teams are growing and/or boast infinite financial resources, other growing incumbents (like Atlassian) need to prepare for a long-term product and mindshare battle and scooping up Trello is a good step in that direction. As Fred Wilson predicted a few days ago for 2017, “The SAAS sector will continue to consolidate, driven by a trifecta of legacy enterprise software companies (like Oracle), successful SAAS companies (like Workday), and private equity firms all going in search of additional lines of business and recurring subscription revenue streams.”
6/ “If I Can Make It There, I’ll Make It Anywhere” – Another solid exit for the NYC startup market, and there are bigger ones to come. Despite Trello being young and a SMB/enterprise product from NYC, it recently internationalized to a few non-English-speaking markets worldwide. As a bonus, while I don’t know the team, from what I hear from friends, Spolsky, Pryor, and their team are well-respected and seem to have done things the right way — their way. Congrats on building a great product.
It’s that time of year, a time to look ahead to the next year and wonder what it may bring. Earlier this week, I reflected on what I’ll remember from 2016. If this past year taught us anything, it’s that crafting precise predictions is a difficult, if not impossible, task. To that end, I view this annual post as more of a “Here’s what I’m expecting to happen that impacts my work in 2017” versus saying, outright, here are my predictions. (Re-reading my “Looking Ahead To 2016” post from last year, the part about VR was surprisingly prescient, yet not for the core reason I initially believed.)
I suspect 2017 will be like 2016, another year of things we couldn’t predict. I could tritely state, “we live in uncertain times.” But, right now, I don’t think it’s cliche or hyperbolic — we simply don’t know what will happen (normal uncertainty), but I believe that most observers are underestimating the amount of domestic and potentially international change that is floating in the air. That volatility in uncertainty will undoubtedly change how people plan or act, and that could have unforeseen ripple effects. To that effect, I’ve been thinking more about technologies, networks, products, and services which could thrive (or are already beginning to thrive, in a way) in a world of increasing uncertainty, and I’ve settled on this list, in no particular order:
Mainstream products and business processes become augmented with automation and artificial intelligence. I know the term “AI” is overused right now, but that doesn’t mean it won’t have an impact. A decade ago, Pandora’s algorithm would personalize radio stations for us, though we had to do some initial work. In today’s buzzword bingo, that could be labeled as AI by some, but what happens when our products at work will anticipate actions or act on our behalf, or when an assistant who has gotten to know me suggest topics to write about, or edits as I’m typing up a post like this, and more? There will be countless forms that fit nicely into world of increasing uncertainties, and this type of oversight and augmentation may help many users when making decisions or trying to optimize for the best solution. I suspect that we will see a significant uptick here in 2017.
The larger, incumbent VC firms have enough cash and leverage to weather uncertain markets. Many of these larger funds raised mega-funds across 2015-2016, many of them managing over one billion dollars in their latest vehicle. The investment period for those funds may grow longer, and these vehicles are set up in a way such that the LPs are contractually obligated to make their capital calls, even if a global financial crisis hits. That empowers these firms with a powerful line of credit if uncertainty rears its head and is indirectly good news for founders, too.
Startup exits will continue to flow from non-technology companies. Just as automakers and offline retailers opened their wallets to cut big M&A deals, I suspect that trend to deepen and intensify. We can expect technology to transform every industry over time, but in the immediate term, I try to think about industries which are under intense competitive pressures, perhaps even existential fear. That fear could motivate actions which make for a new kind of exit environment. I wrote a bit about this in my 2016 reflections post, which you can see here.
Digital currencies will be offered as part of a sophisticated investor’s portfolio. This goes beyond Bitcoin. With so much political uncertainty worldwide, coupled with advances in technologies like blockchain and others, the tokens/coins issues to help fund and maintain these products could generate huge returns for the early or helpful backers. People are already buying these tokens, of course, but I think it will go a step further and new types of hedge funds that have been created will allow for some indirect but high-beta exposure to a relatively new and obscure asset class. In an uncertain world, for creators and many citizens in less stable places worldwide, these new products present a vision for the future that excites many — while at the same time, it allows others to participate without permission by swapping currencies.
(Honorable Mention:Voice as a user interface. I suspect we will see much more and I need to write on it separately. I am not sure how it fits into the uncertainty theme above so maybe best for another post.)