Technology Archives

Venturing Along With GGV Capital

As many of you know, I have been a venture partner to GGV Capital. Today, GGV Capital announced me, along with another Venture Partner (Denise Peng, formerly of Qunar) and a new EIR (and and my old friend), Jason Costa. More precisely, I have been a Venture Partner with the firm for about a year now, after years of being a consultant to the firm (as well as other firms in the past). For someone like me who is just starting out in their investing career, a dream opportunity.

Yes, I know — it is an unusual, unconventional split-role and association for someone to have, but when I look back on my work history and timeline, my career has simply never fit neatly into a LinkedIn profile. After years of struggling to find a way to cut into the investing industry, I had the fortune of choice last summer. While still raising and deploying Haystack, the early-stage VC fund I started and currently invest out of, the six managing directors of GGV — all whom I’ve known for years — were creative in finding a way for me to join them on certain key projects while supporting me in my own efforts to build up the Haystack franchise.

GGV has been, from its first day almost 20 years ago, a differentiated venture fund. The firm was founded on the thesis that the interconnectedness of the world’s two largest economies — the U.S. and China — would increase over time. Throughout its history, the GGV Capital team has been fortunate to be associated with some of the most iconic global companies and operated seamlessly, at scale, across the Pacific Ocean.

It’s worth noting GGV and Haystack operate at slightly different scales ;-)

Haystack is roughly $10M in the current fund, Fund III (and is only 40% invested). GGV just raised its sixth fund at $1.2B. As part of this special opportunity, I spend my Mondays at GGV and participate in a variety of the firm’s internal meetings. As someone who hopes to create a franchise fund, I am fortunate to have a front-row seat to learn how a large, global venture capital firm operates at scale, makes decisions, builds relationships with limited partners, and works directly with founders and entrepreneurial executives at startups.

This is all the professional stuff.

On an individual level, like many other VCs in the ecosystem who have helped me and individually been an early backer of Haystack, all of the six MDs of GGV have all been personal investors in each Haystack fund. They have even gone so far as introducing me to some of their LPs so I can build relationships with them over the long term — a very generous gesture. When GGV debates a large investment, the MDs will sometimes seek my counsel, and it feels great that they would care to ask my opinion. On the flip side, when I am stewing over a small investment in a very early-stage startup as a single-GP fund, I can always call or email one of them and have them spar with me about why I should or shouldn’t do the deal. Like with their founders, they will always make the time for me.

Almost a decade ago, I was on a path to finish graduate school and move to Asia. As part of that process, I spent many years traveling to and working in India and China on a variety of projects for the university. Ultimately, I chose to come back to the Bay Area, but those experiences in India and China still live with me vividly, and I learn so much via osmosis at GGV about how technology and consumers in Asia are building the next new things.

As we saunter into the final months of 2016, and as I set out to raise Haystack IV in 2017, I am thankful for all of the opportunity that’s laid out before me. As someone new to investing, there is no playbook and guidepost on how to do all of this stuff they call venture capital. Now, I get the benefit of working with two platforms and that is both exciting and liberating.

Reflecting On My Investment In Chariot (Acquired By Ford Motors)

I woke up on Friday ready for a day of back-to-back to meetings. Scanning my email, a few reporters had sent short emails asking about some embargo related to Chariot. I texted Ali, the CEO of Chariot, with a casual “Hey man, what the…?”

Then around 10am, my iPhone started to buzz. As with any type of acquisition of a consumer product or service — and especially one in the transportation space, which is red-hot this year — the news that Ford Motors had purchased Chariot (via it’s Ford Mobility Solutions arm [official Ford press release]) was of keen interest to folks in the echo chamber and beyond, as evidenced by the fact it was widely covered by The Wall Street JournalThe Verge, CNBC, Recode, Business Insider, WIRED, and more.

Investing in Chariot was a different sort of move for me, and it ended up being a different type of investment. Initially, I thought Chariot was a joke — as in, it couldn’t be real. Then, I received a very nice email from Ali, the founder, and poked around a bit more (see below). We agreed to meet. Over the course of a few months, we met a number of times. We didn’t have any mutual friends. I had to check his references. I even had to call his lawyer to verify his company’s bank account, records, and other items. Everything checked out.

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I still didn’t invest because it was so early. In that time, Ali and I became friends (spring and summer of 2014), and eventually I told him that I’d like to invest a little but mainly introduce him to everyone I know. At that point, Ali had raised some money from friends and family, had gone through the local Tumml accelerator, but couldn’t get past that milestone. Notably, Ali put down nearly $100,000 of his own money to lease the initial vans to get the service going. It may not sound like a lot given all the money floating around the Bay Area, but when you hear a pitch from Ali, you could feel that cash commitment was more than just a pound of flesh.

Chariot careened onward over the years, getting to the point where so many consumers would use it frequently (it had incredible retention rates), riders would spend over half a million dollars per month just along a few routes in San Francisco. It turns out that lots of people just want to get to work and back home without hassle, and they’re willing to pay a bit more than Muni for that comfort, but a bit less than UberX. Chariot added some interesting twists to its expansion model, most notably that it would encourage commuters to organize themselves and crowdsource their demand for new routes and “tilt” a new line. Along the way, Chariot outlasted nearly all of the other well-funded competitors in the space, and while we all know it’s hard to raise funding, imagine for a moment pitching Chariot during a time when Uber is surging worldwide and in your backyard. That is another level for degrees of difficulty.

I finally got to talk to Ali late last night, the day of the news of the acquisition. He told me the whole story of how it unfolded, and how he drove it to a close. It’s not my story to tell (more on that soon), and those details are a bit beyond the point. What’s most important to me — and when I’m writing this now, I don’t even know the size of the outcome [1] — is that working with Ali never felt like work — we were and we are friends. Work has evolved to a point that in some special cases, you are just hanging out with and helping your friends. As Ali was building up Chariot, he would periodically reach out to me, to ask me how I was doing, how building up Haystack was going. He even went so far as to ping all of his old banker friends and big families in New York City (where he’s from) on my behalf. Ali has called me countless times expressing his deep frustrations with some aspect of his quest to give birth to and nurture Chariot, and we have had our share of difficult conversations. There was a time where we didn’t really talk for a quarter or so, but we always remained friends. That made it even nicer to chat with him last night and hear the details — I could hear in voice that he was both excited and relieved, that a part of the race was over and he could energize for the next challenge ahead with Ford, which frankly sounds like an incredible opportunity for him and his team [2].

Some of the “exit” blogs from the investor-side can veer over into analysis — I could’ve have written how Ford is perhaps transforming from an automobile manufacturer to a transportation company. Or, some of them veer into the realm of how much work the investor did to help build the company — I did the syndication stuff, the YC stuff, etc. and I helped close some candidates, but to me, the real story is that Ali and I became friends through the process, and that’s what I’ll remember when I look for the next investment to make.

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[1] I received over 50 emails and texts yesterday from friends. All asked about the price, too. I have no idea! I wish I did, believe me. Ali is a vault. What I learned from this process is sometimes even larger firms don’t know the final price of a deal until the wires hit.

[2] Ali wanted me to mention that he is continuing with Chariot, full steam ahead, now with more resources at his disposal, and he is aggressively hiring: www.chariot.com/careers

The Story Behind My Investment In Saildrone

Years ago, I used to work in Oakland, commuting downtown daily while living off Dolores Park. That seems like a lifetime ago. Now, entrenched with work and family in the Valley, I rarely get to make it over to the East Bay — I wish that wasn’t the case, as I do believe many great founders emigrated across the Bay Bridge for slightly more sane rents and in anticipation of the changes coming with the spillover effect of entrepreneurship, as well as Uber’s new building in downtown Oakland. Perhaps the promise of gritty new founders and food with real taste will lure me back over time. I hope so.

Earlier this year, I invested in a small company in the aviation defense space. The founder of that company works closely with various agencies associated with DARPA and the Department of Defense, and even before the ink dried on my investment in his company, he told me about another “drone” startup in the East Bay — but this one built autonomous drones for the ocean. What? He couldn’t remember the name, so I did some web sleuthing and finally stumbled upon the company, indeed located in Alameda. I had a number of mutual connections to one of the co-founders, and reached out to him directly.

He wrote back right away.

In a few days, I rearranged my schedule for the day in SF and took a trip across the Dumbarton Bridge, up 880, and snaked my way to Alameda, out to the shore, and into the old hangar that now houses Saildrone. I got to meet the team, toured the facility, and saw the construction of various sizes of bright, buoy-orange seatless catamarans, outfitted with a neat onboard sensor panel, solar panels, and an unforgettable dorsal fin. I went through the motions in meeting, but in the back of mind, I was mainly thinking, one, “How do I get into this company?” and two, “How can I help them raise the round they need to?” I immediately assumed the former would work out, so started working on the latter, and am happy to have brought along a great VC firm into the syndicate around the Series A.

There are so many things Saildrone can do, but perhaps the most interesting is in its cost-efficient capabilities to continuously collect ocean temperature data down to the fractional degree in various ocean microclimates. For those who know how climate change models are built, one of the largest assumptions in those models concerns ocean and sea temperatures — a vessel like Saildrone can capture a granular-level of temperature data that can hopefully better inform and bolster those models. And, this is just the tip of the Saildrone dorsal fin, so to speak.

Saildrone is an exciting investment for me that touches upon three seemingly unrelated themes I believe will play a part in defining the future: (1) The market for industrial robotics, including autonomous drones (whether aerial or water-borne) will be enormous — I have a future post coming on this topic and my various investments in the space, stay tuned; (2) That local governments and municipalities will be under financial pressure from lower tax bases to reinvent their operations and services with software (which lines up with my investments in Remix, OneConcern, and Seneca); and (3) The rate of climate change is actually accelerating faster than even most liberal models can predict, and will force many coastal nations to set aside billions of dollars for FEMA-style funds to pay for all sorts of technologies to help deal with the effects of rising sea levels and atmospheric change — this lines up with OneConcern, and now Saildrone (check out a video here and see yesterday’s coverage in The New York Times).

The Story Behind My Investment In Mux

Earlier this year, Mark Zuckerberg stood in front of a deceptively simple and elegant slide that laid out the future of what Facebook will focus on. In that slide, we see everything from satellites to artificial intelligence, and beyond. In addition to far-out technologies, we also see a heavy emphasis on the power of video — delivered on the web or via mobile. And as 2016 has unfolded, we see mobile video exploding across brands like BuzzFeed (with Tasty), new brands like Arsenic, and of course, Facebook and its various mobile properties getting into the game alongside players like YouTube and Snapchat.

As everyone knows, increased video consumption in general is large consumer trend. While there’s certainly opportunity to invest in new brands emerging built on top of social networks, I am also interested in what founders will help power the underlying infrastructure of the growing market. Relatively speaking, watching video online or on your phone today is still relatively a new thing — and the experience isn’t great. We know a huge wave is coming — across America, most video consumption at homes is still via traditional cable — the Rio Olympics had 26M prime-time broadcast viewers in the U.S. versus about a half-million or so streaming viewers. Eventually, this will flip. Who will make that so?

On the Friday after the W16 YC Demo Day, I reluctantly took a meeting at 4pm, right before picking up my daughter at daycare. A friend recommended I talk to Mux because he also invested. Ten minutes into the chat, I was very glad I did, and 90 minutes later, as I drove away, I was figuring out how to squeeze into the deal. The founder of Mux, Jon Dahl, and his team are known in both the video (Zencoder) and open source communities (VideoJS) for bringing a deeply rich and technical background to their field.

Earlier this week, Jon asked me if I would write something in conjunction with Mux’s funding announcement. “Of course,” I replied — I am proud to be an investor in Mux, but I don’t like “timing” my posts with the onslaught of news, so I’m writing this today on a lazy afternoon where fewer people will see it. That’s no matter. Additionally, Jon pummeled with stats about the online video industry and technical jargon to include, but that wasn’t why I invested. In invested in Jon because the depth of his experience in his field is self-evident, because he received a strong recommendation from a close friend, and because the initial core of the company he’s building has started out with his friends — he doesn’t have to turn into a full-time recruiter to get off the ground, and within their long-lasting network, Mux can snap its fingers and get to millions of ARR when its first product hits.

Jon’s background and his team’s background give them a headstart in what will be a large, growing, and dynamic market. I simply believe that Jon and his team can do what they say they’re going to do, and it’s been fun to provide a pinch of help along the way. But the truth — the dirty secret — is that Jon and his team don’t need much help to get out of the gate. And, I get to go along for the ride.

The Story Behind My Investment In Shaper Tools

Earlier this year, a seed investor I co-invest with frequently offered to introduce me to one of his favorite companies. This startup raised a small seed round a year ago, and in that time, they brought in a new CEO, sharpened their focus, and — lucky for me — I was able to be a part of their next round of funding.

As those who have been following along, I’ve been spending more time in and investing more in what I have called “Industrial Software and Robotics.” The thesis, simplified, is that many of the world’s cutting edge technologies today will first interact with the outside world in the commercial space, specifically in heavy industry. To that end, over half of my portfolio in Fund III is tuned to this industry, so I am staking a part of my career and reputation here.

That may sound risky from a portfolio perspective, but every time I meet one of the CEOs in this space, I am blown away by the range of skills they possess. And with Shaper Tools and Joe Hebenstreit, that happened before we even met face-to-face. Aside from being a fellow Wolverine (Go Blue!), Joe’s career has taken him from Urbana-Champaign to Ann Arbor, from DaimlerChrysler AG to Amazon’s Research Labs in Silicon Valley, from frog designer to Google Glass. After visiting the Shaper Tools workshop in the Mission, meeting the team, and scouting the market, I focused my diligence on Joe’s leadership. The line that stuck with me most: “Joe is staking his industrial reputation on this team and company.”

Shaper Tools rests in a space that some refer to as “human-involved robotics,” where technology can be used to assist — not automate or replace — human work. In the case of Shaper Tools, that could be seen as large advancements in hand-eye coordination; and augmented-reality fabrication, which ties back into Joe’s experience on the Glass team. This is an interesting play into the forthcoming world of 3D printing, based on the belief that humans will still want some agency, control, and tactile feeling of completion of creating something with their hands, even if assisted with technology.

This week, Shaper Tools formerly launched Origin, a handheld power tool which merges computer vision with real-time motor control. In a world with Origin, imagine being able to create your own desk at home, or buying designs of your friend’s desk and making it at home. Origin enables a cut similar to what a CNC router would offer, but at a fraction of the size (it’s portable) and cost — and without needing prior experience. (Note: Origin is the name of their first product, not to be confused with another Haystack portfolio company, Origin, which is in the 3D printing space for additive manufacturing.)

If you’re into woodworking and machinery, make sure to check out Shaper’s website, learn more about the great team Joe leads, watch their campaign video (which actually made me tear up at the end), and look at the pre-order offers here.

Five Takeaways From Walmart’s Acquisition of Jet.com

Jet.com, once laughed at — or, should I say, often laughed at — will now have the final laugh. Walmart will announce tomorrow that it has acquired Jet.com, which has raised upwards of $565M of venture capital from some of the best funds in the world, for $3.3 billion. That is a home run, and CEO Marc Lore is now laughing all the way to the bank. This news will stun many in startup-land because, in some ways, it’s unfair — a negative gross-margin business with a huge capital raise could’ve been a symbol of tech and startup excess — and yet, here we are, counting the ways in which the cap table will get paid off for their risk.

Here are my quick takeaways from the deal:

1/ Teams and Targets Matter: Lore’s history with Diapers.com was already a success. He famously didn’t love what happened at Amazon post-acquisition, so he went all “Revenant” on his former employer and launched Jet.com, raising what seemed like (at the time) an obscene amount of venture capital. And, he repeated this with a model that was part innovative (help CPG create a channel right to the consumer) and part-silly (losing tons of cash to acquire customers). Lore’s bravado, big goals, and chip on his shoulder helped him field a team and attracted VC money. That’s all those investors needed — a big market and someone who is proven and is on a mission. (Making a few assumptions based on Pitchbook data about the company’s first round of financing, a VC writing a $10m check in the first round at an implied valuation of ~$150M, with ownership maintained pro-rata, would now be returning 20-22x that amount in about two years’ time, though we don’t yet know how much of the total sale price is related to Lore’s and the team’s earn-outs.)

2/ “Climate Change” in The Retail Sector is Very Real: About a year ago, I wrote this post on how the challenges facing traditional retail in the U.S. were so steep, a range of startups could jump in and make very strategic acquisitions. In this post, while I mentioned Walmart’s woes, even I overlooked Jet.com as a potential puzzle piece for an incumbent. I will admit that I didn’t fully understand the dynamics here and, having never met the CEO and his team, clearly underestimated how much confidence they can inspire, even if their audience is living in fear.

3/ Startup Life is Unfair: Like life, startup outcomes are not fair. I can imagine many founders who haven’t broken through yet and investors who haven’t seen liquidity in years shaking their head in a “WTF” rage. To some, Jet.com represented too much risk to take; to others, its inherent risk and need for cash was its appeal. Risk, like love, is in the eye of the beholder.

4/ Walmart Isn’t Dumb: Yes, Amazon is very smart. A savvy investor friend of mine (who was in this Jet.com deal early) recently remarked to me that Walmart is the only U.S. company that had enough cash and heft to make this move to level-up against Amazon. The natural reaction in startup-land is that there’s no way The Waltons can keep up with Bezos, but then again less than 10% of all commerce in the U.S. is transacted online. Who will help the remaining 90% accelerate? (Side note – I like Priceline’s angle here, too. That’s for another post.)

5/ M&A Chatter Turning Into Reality: I’ve been back at my blog writing a bunch lately, all unpacking huge acquisitions. This chatter has increased over the past few weeks. With stock prices at all-time highs and incumbents with huge cash sums sitting around, everyone in the ecosystem is hoping this triggers a 6-12 month wave of consolidation, to move from a “dry bubble” to a more liquid realization of value — in cash.

Five Quick Takeaways From Salesforce’s $750M Acquisition of Quip

These big deals are cutting into my sleep! Another day, another interesting deal in startup-land. This one wasn’t quite as big as the $35b Uber-Didi deal, but it’s still big. Quip was just acquired by Salesforce, reportedly for $750m. Quip raised two rounds of VC totally $45m (per Crunchbase) and was a deal that didn’t really hit the VC market as Bret Taylor has been known and tracked for years as a top-flight product designer and entrepreneur.

1/ Front-End Collaboration: Dropbox has Hackpad, Microsoft has Office Suite, Google has Docs, and so forth. Quip gives Salesforce a well-crafted front-end collaboration tool to distribute to its ecosystem. The common thread here is apps sitting on databases to move higher up the stack for value.

2/ Consumer-Grade Product and Design Chops: Benioff noted in a few interviews that he’s had his eye on Quip’s CEO, Bret Taylor, who boasts a top-flight product design resume from Stanford, Google (Maps), and most recently Facebook, where he was a top exec. Elite product design is the ultimate skill in startup-land. Any one of the enterprise companies listed above would’ve paid up to have Taylor and his team folded into their offering — we can assume most put in a bid and that Salesforce probably bid the highest. (Benioff was also an investor in the company.)

3/ Capital Efficient VC For Top-Tier Talent: Taylor was and is a highly sought-after target for VC investment. If we assume he gave up 33% for $15m up front to work with Benchmark as a lead, that would put the return at 16.67x in 3 years time. Put another way, that $15m turned into $250m in three years. (To clarify, lots of assumptions here — it’s possible the $15m raise was much less dilutive for Quip — I don’t know those details. We also don’t know usage numbers, but Quip had a pricing model similar to Slack’s in that you can use it for free until your team got to a certain size. Benioff may have seen the retention numbers on the product be very sticky and translated that to dollar signs when pumped into the Salesforce ecosystem.)

4/ M&A Echo Chamber Chatter: In the last month, there have been more posts and tweets hinting at more M&A from incumbents, who are sitting on cash, all-time stock market highs, and potentially fearful of the future in terms of product innovation. As news hits every week about a mega-merger in Asia or a huge talent deal like this, the shot of liquidity gets peoples’ blood moving and there’s more chatter amongst investors about potential “special situations” to see liquidity in what’s been obviously an illiquid climate.

5/ Creating Something Simple Is Difficult: I wasn’t an avid Quip user, but many good friends were. They would consistently talk about using the product but never rave about it in the same way as other apps or services. I wonder if that’s because so much of Quip’s elegance in design shielded the user from those details. From the times I used it, I could tell it would sync across apps and servers almost instantaneously (it reminded me of Orchestra) and allowed people to collaborate with many people on a document and use design to strip away the noise.

My Five Quick Takeaways From The Uber-Didi Deal

It is late (for me) on a Sunday night and my Monday is packed, so I’m going to forego some sleep and quickly jot down my thoughts and reactions to the news that Uber is leaving China, taking investment from its Chinese rival, Didi, and taking a 20% ownership stake in the combined Didi-Uber China entity. There’s no way for me to cover every angle of this and I’m half-asleep, so please forgive the short burst of thoughts — tracking a company like Uber may require a full-time staff! I’m glad I didn’t go through with the book — Uber writes a new chapter every month:

1/ Cutting Uber’s Burn Rate: It’s an open secret that Uber burns a lot of cash, way too much for public market investors to stomach. Because it’s market opportunity is so large (transportation, logistics, applications), they can curry investment favor from strategics, nations, and consortiums. One wonders how much cash Uber had to spend to compete in China, arguably the fiercest market in the world. Now Uber can conserve the cash on its balance sheet (see below) and direct that cash toward other things.

2/ In Land War, China Is The Prize: There was probably little to no chance for Uber to survive in a market like China’s, for a host of reasons. Nevertheless, it competed with strength, but as the belts tightened and as the cap table for each company became more strategic (cough cough, Apple invests in Didi a few months ago, perhaps to position itself against Uber if needed?), the end-game was near. As an exit, 20% of that combined entity feels like a steal for Uber, as China’s massive population and growth rate are unparalleled. (Uber, which may go public one days — will need a clear story to tell The Street. Not all of Uber’s experiments will work out in the end, but they’re trying so many and doing well with them, demonstrating this discipline will win points down the road as Uber undoubtedly will get more focused.)

3/ Scale and Scope of Uber’s Geographic Ambition: We should pause and stand in awe of Uber’s pace of execution and the scope of its ambition to even go into China. Incredible.

4/ Uberducken Alliances: Can anyone follow which major tech companies have invested in Didi or Uber or Lyft, or all of them? Or can anyone track all the allegiances, treaties, in-app cross-promotions, etc. between companies like Apple, Tencent, Didi, and Lyft, and others? I cannot and will not even try. It’s like one big Turducken.

5/ Uber Can Now Focus Up The Stack: Ok, so Uber won’t own China outright. That was likely never possible. Now as it presumably preserves some cash, it can apply those resources to technologies “up the stack” for a world in which your Ubers are autonomous — that could be pods or cars, sensors, robotics, mapping technologies, deep learning, and a host of other requirements to make a fully-integrated self-driving network a reality. With 80% of each fare you pay going to your driver, the company has a huge incentive to bite into that for its next big meal.

Transparency Is Coming To Venture

Today is a big media day at Haystack Fund! Just kidding, but for some reason, previous discussions I’ve had with reporters and media all seemed to surface online today. As I was reading through them and figuring out how to share them, I noticed a theme running through the conversations.

Why all at the same time?

If I had to pick a reason, it would revolve around the idea of transparency in venture. Now, I don’t mean transparency for transparency’s sake, as many people leverage it for their own branding or marketing — and there’s no harm in that. For me, I am thinking about the future of how private companies are discovered and get financed. Part of that future, I believe, will be operating in an environment with more regulatory oversight over how reporting is conducted in the private sector. That means, how do companies report to their venture investors, and how do venture investors report to their investors, the limited partners? And, as more information is shared, how do all parties ensure the information isn’t shared more broadly without a record of who has keys? These are all pertinent yet thorny questions, and with political change in the air, I see these coming.

That theme comes out in the conversations I’ve had below:

1/ Katie Benner of The New York Times: Katie is a friend and a darn-good reporter. She has written before for Fortune, The Information, Bloomberg, and now The Times. She also wrote a great piece on how employee options work at Good Technologies, shining on a light on a topic that affect so many in the ecosystem. Recently, I spoke with her and am quoted in her article today, titled “Making Startups’ Financial Data Free And Open,” which appeared in the July 25, 2016 Times.

2/ Guesting for StrictlyVC: Each summer, I get the pleasure of writing for StrictlyVC while my friend Connie takes a much-deserved break and searches the shores of coastal Maine for rare sea glass. Last Friday, for my column, I wanted to share more details about what I’ve learned in raising three small funds. You can read the FAQ on StrictlyVC here. For some reason, I get a lot of questions about it, and I’ve committed to sharing the lessons I’ve learned (with a grain of salt) here in an open way. The angle of transparency I’m going for here is that it’s really hard to get the funds up and running. Just this weekend, I talked to a friend who has been a founder and had a huge, notable exit as an investor, and is still having trouble raising a small fund. More on this below.

3/ Interviewed by Harry Stebbings on The Twenty-Minute VC: You have probably heard one of Harry’s podcasts. This guy is a machine when it comes to creating, editing, and distributing podcasts. And, he really prepared for our conversation. In the discussion, we chat about topics such as: defining “founder-friendly;” branding in VC, experiences in raising a fund, and more. I want to stress again that Harry did a great job editing this down to 20 minutes and you can listen to my soothing voice, but not when you’re driving, please — you may fall asleep at the wheel! (Link to Apple Podcast here.)

Venture Capital as a Hyperlocal Game

A few weeks ago, Chris Mims of The Wall Street Journal wrote a great piece on the struggle between entrepreneurial energy spreading across the country while the dollars allocated by LPs in venture capital funds increases in concentration in the Bay Area. Specifically, Mims reports that while the share of U.S. VC dollars allocated to startups in L.A., NYC, and Boston roughly amounts to 20% overall over the past two decades, the share going to Bay Area startups has ballooned from around 30% two cycles ago to over 50% in 2016, when we saw many large funds scoop up massive LP dollars.

This is a touchy subject, because for a variety of reasons, the Bay Area isn’t the most welcoming place considering the costs and cultural corners, yet as the country emerges from the Great Recession stronger in aggregate, the “cap table” of that rebuilding has shifted dramatically to the coasts (and a few coastal cities in particular), and especially, to the Bay Area. Additionally, before I begin this post, I want to disarm the chorus in advance — I know that companies can be built anywhere, and that there are plenty of examples of VCs in the Bay Area investing outside their market, as well as great VC firms which are headquartered outside the Bay Area. There’s an advantage to being local, and those who breakthrough outside this chamber deserve extra credit, for the odds are more difficult.

The point of this post, however, is to share some observations on how location — either via proximity or distance — drives so much dealmaking, and then to share some ways to overcome geography. I’m reminded of the lyrics of a Tina Turner classic: “What’s love got to do, got to do with it? What’s love but a second hand emotion?” Just replace “love” with “location,” and the answer is: A lot.

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Why is location so important to LPs, those who invest in VC firms, and the VCs themselves?

1/ Only way for VC firm to exit is IPO or exit (or selling shares in future rounds). IPOs are rare, and becoming tougher given the startup narrative to stay private as long as possible. Exits are also rare, and most of those big exits (per CB Insights) occur in California. If location drives M&A, location will also then impact where a VC allocates dollars. (Location also helps drive a closer bond between VC and founder, which helps in cases like special liquidity events for an early investor to sell shares, among other techniques.)

2/ Proximity affords VCs more time to track a founder or investment. Whereas the seed world moves on quick decisions, I’ve seen many VCs track potential investments for about a year, either waiting for the timing to be right and/or to gain a better picture of the company and team. Here, proximity drives familiarity and eases the fears of an investor who may not otherwise have enough time to get comfortable with the risk presented to them.

3/ LPs want their GPs to be active managers of their investments. It’s possible yet still hard to be an active VC or Board Member when the company is a 6-hour flight with a connection away, but yes — I know — many do it. But, that right has to be earned. If you look at the folks who do this well, they are considered rainmakers by LPs. And, there aren’t tons of them.

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Ok, if this generally the reality, then what? Here’s how I briefly breakdown what startups at various stages should consider about Bay Area capital:

Seed – If you’re outside the Bay Area, raising seed capital in the Bay Area is hard. Seed capital is mostly institutionalized now, meaning those investors are investing other peoples’ money, and in order for them to get a return, they need to see a large potential multiple on what is a smaller check, and one where their stake will get smaller with success via dilution. For founders in ecosystems like LA, Boston, NYC, Seattle, Chicago, seed ecosystems have emerged thankfully to pick up the slack. Those funds can theoretically be more “active’ with their investments by being local, and theoretically help prepare those seedlings for future rounds, where the Bay Area may come into play. For those who are pre-seed or in the seed stage without much traction, it is really hard to raise a seed round in the Bay Area because local investors here have so many options to invest locally.

Series A and Series B “Classic VC Rounds” – Because of the economic incentives of traditional VC funds (firms managing $150m to $1 billion or so), those GPs have to allocate their dollars to the best economic opportunities they see, regardless of location. It is already quite difficult for a Bay Area company to get a Series A done, so imagine how that risk increases for something out-of-market. That said, and no one will say this publicly to you, but the bar is exceptionally higher for a Bay Area VC to make an out-of-market investment. Yes, they will miss good companies (as I wrote last night about Dollar Shave Club). Luckily for founders, non-Bay Area VCs will invest out of their own market, as we saw with Dollar Shave as well, or with east coast firms that invest in Europe, and so forth. For those founders who are outside the Bay Area and seeking a classic Bay Area Series A or B round, the formula to score one is to (a) demonstrate exceptional growth, where you will be offered multiple term sheets, or (b) invest in a long-term relationship that eases the fear of location in the eyes of your target VC.

Growth VC, Pre-IPO or Pre-Exit Rounds – At this point, more people want to give you money than you have room to take, and regardless of your location. So if you make it here, location doesn’t matter.

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This is a tough subject to write about. I know it’s unfair, especially as so much of the rebuilding from the Great Recession is seen through the opportunity of building a business. Everyone wants to be Zuckerberg or be on Shark Tank. Everyone wants to be CEO or an investor. And while it is possible, location drives a lot of it, and that particular location isn’t an easy one to physically crack into.

I myself have flirted with the idea of not living in the Bay Area given the increased traffic, congestion, and cost of living, but then I see the power of the local network effect and get nervous. So much of what I do is a local game. Hyper-local, in fact. I’m in awe of those who do it outside the physical network because it means they are even stronger. We moved back to the Bay Area in 2011, and I wonder how hard it would’ve been even if that was pushed back a year. As I’ve shared with you all here, I’ve had a very hard time finding a space in the ecosystem and generally believe my proximity to the epicenter helped me increase my “surface area of luck.”

I wanted to write this post because this issue has come up a bunch with founders I interact with outside the Bay Area, and I know reporters or larger VCs won’t write about it because most reporters don’t understand the nuance to the financial issues like Mims detailed out and the investors don’t want to cut off any potential flow of deals.

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There is a silver lining, however: With billions more people coming online worldwide over the next decade, with new geographies emerging with their own capital bases, with traditionally underrepresented minority groups begin growing into the dominant majority, and as larger Bay Area firms grow even larger fund sizes, the types of opportunities created over the next two decades may look different than what occurred over the last two decades. And, thankfully, there are plenty of LPs and VCs (even in the Bay Area) who see the opportunity and are positioned to take advantage of it — or have been taking advantage of it for quite some time (more on this in a future post). You’ll hear about those returns over the next few years.

Haystack is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2016 Semil Shah.

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