For early-stage startups with the luxury to have this problem, a common topic that comes up in conversation lately is: “Well, how much should we raise?” I have a hard time answering that question with a specific number because everything is so case dependent and I don’t usually have a good sense of what the founders have in mind for long-term planning. And, even though I have my own experience to draw from, I’m not sure it’s applicable or proper to extrapolate from. So, in the absence of that, I end up stitching together three separate posts from investors who have way more experience than me:
“What A CEO Does.” In this post, there are three jobs for the CEO, one of which is he/she “makes sure there’s always enough cash in the bank.” Sounds obvious, but worth repeating and adds a solid foundation.
And, finally, there was a @pmarca twitter thread about this. I believe some people drew the wrong conclusion from that online discussion, getting hung up on the name of a round (seed vs A, etc.). All that crap is semantic. I tried to write about what it really means here. Essentially, if an early-stage startup has ended up raising around $3m or more, an investor like Marc Andreessen (and maybe this shifts with each person) will expect that startup to have even more evidence of usage, traction, and/or revenues. Those are the expectation of a big top tier fund, and in discussions with folks at those places, they all agreed.
I have noticed in the past few weeks that founders I’m talking to are now more aware of this. I didn’t connect these dots until a few days ago, so it was helpful to go through these conversations. One founder, for instance, wanted to raise $1.2M. He blew by that, and then decided to go up to $1.75M if high-value or strategics came in. But, he asked me, “What should I stop at?” He could’ve kept going. It can be tempting. But, I didn’t have a good answer for him…so, I wrote this post instead.
The type of language we use is important, and especially so when a founder and investor are discussing a business. Lately, I’ve come across the word “customer” quite often in conversation. It’s a sign of the times today that even early-stage seed level companies are courting and retaining customers (which is the topic for another upcoming post). For now, I want to focus on the word “customer.”
When I hear most founders say it lately, it is intended as monolithic — for instance, “We have seven customers right now.” But, what I hear is something different. My ears and brain interpret the word “customer” differently and therefore, I usually stop and interrupt. I want to know more. All customers are not equal. Here’s how I segment them today — and, please, if you have a better way, please let me know and I’ll update the post.
[Alpha Customers] These are customers of any size (often not paying) who are doing the startup company a favor by testing the software or service. Founders need these customers to refine the product, collect data, etc. Over time, they may, of course, convert to real customers.
[Beta Customers] These are customers who might be paying but are limited to set a set size by the startup and, in good situations, coming off a waiting list as the founders figure out how to scale and meet more demand.
[Reference Customers] I’ve observed some founders using their networks to target bigger, brand named companies as customers and giving away their product or service for free, on the implicit agreement that the larger company would act as a future reference for the startup. For instance, a startup may have a connection to WorkDay, give them their beta mobile app across the company for free, and in return, WorkDay’s CIO (or someone) will act as a reference for future customer leads.
[Real Customers, SMB] How one classifies “small” and “medium” here is up for debate, but maybe it’s all under 1,000 employees. Who knows. The point is, they need to be distinguished from large, enterprise-scale customers.
[Real Customers, Enterprise-Scale] The toughest to get and the most sought after. Logos and scale matters, not only for business purposes, but as a signal toward how the founding team can access and sell into larger companies.
Earlier this week in NYC, I was invited to participate on the investor panel at the SVB Marketplaces Mashup. In short, it was an outstanding event. At the bottom of this post, I’ve embedded a hashtag search from the event, and if you touch on marketplaces in your work, I’d recommend scanning the timeline. Before I dig into the meat of the event, I’d like to give a shout out to friends at SVB (like Shai) — I’ve now been to about 5 of their events, and each time, it’s outstanding. They care about the framing of each speech, panel, and cocktail hour. I learn a ton at these events and would highly recommend them as high-signal. (I know this sounds like an ad, but it’s how I feel.)
The main point of this particular event was to talk about marketplaces. And the deck was stacked. Execs from Airbnb, Uber, and the founder of oDesk all gave keynotes sharing key stats and best practices for the cutting edge of marketplace design, growth, policy, and management. The presenter who stole the show was Todd Lutwak, of eBay fame (and now at a16z) — if you can get your hands on his slides, it’s a business school course right in there. As they usually end these events with the investors up on stage, I spent the day going in and out of sessions, catching up with friends, and trying to wrap my own head around marketplace issues that matter in my line of work. And, that is, specifically, that the word “marketplace” is defined by different people differently and, moreover, used to describe specific businesses in a somewhat apt yet not precise way.
After the event, I was hanging out with Andy and we talked about how, on one hand, marketplaces are going to increase in number. Of course, they’re antifragile! And yet, on the other hand, how we don’t have a good way of classifying them. So, below is a more structured recounting of our chat. I don’t share this framework as an absolute, so I’d love your feedback and thoughts on what makes sense and what needs work. At a high-level, I see four (4) types of businesses than one could classify as a marketplace, though I do believe resiliency is a function of how pure the marketplace is:
Pure Marketplaces: Connecting buyers directly with sellers. These are the eBays of the world, using the web to find equilibrium between supply and demand of goods and services. There are very few of these that don’t need much curation or policing, but ones that get big in this category get *really* big. See: Airbnb. And if the web spawned an eBay, imagine what mobile could create — see: Uber.
Curated Marketplaces: Some marketplaces need curation. Ride share companies need to vet drivers and conduct background checks, for instance.
Other Business Models With Marketplace Dynamics: Companies I’m involved with like Instacart and DoorDash are sometimes called marketplaces, but I don’t think that’s quite right. To me, they’re e/m commerce companies that contain a marketplace dynamic, like metered pricing, and having their drivers pick times and jobs to claim.
Marketplaces Plus Subscription Services: This was brought up at the panel and I was curious to hear of these models. I asked Andy and he too hadn’t heard of them. Josh from Sigma West wrote a great post on this hybrid model (click here), and I’d love to see more of these, if anything that all investors, private to public, love the resilience of marketplace models and love the predictability of SaaS business models. (Josh is a great thinker on this subject, I’d also point out to this post he wrote about slicing marketplaces startups yet another way.)
Earlier this week, my friend Alastair Goldfisher from the Venture Capital Journal invited me to participate on a panel as part of Venture Alpha West 2014 in Half Moon Bay. I didn’t know what to expect, but randomly, I bumped into a bunch of old friends, saw Renee DiResta and Matt Withieler speak on hardware, and the topics overall touched on my two core areas of interest: investing and mobile technology. Here are some brief notes from the event:
Hardware:OATV’s DiResta gave a keynote on the rise of the hardware maker movement and what she expects to unfold over the next 3-5 years. Flybridge’s Witheiler was on a panel discussing how VCs leverage crowdfunding platforms to estimate consumer demand and then use online channels to sell goods directly to customers. Having had the luck to invest in hardware companies like Coin, Navdy, and Skylock, I see the potential though still remain scared about distribution after the Nest sale. My biggest takeaway on hardware from the event is that enterprise-focused and/or commercial grade solutions for hardware are likely a much more attractive investment category given the pain of consumer distribution and price points.
Wearables: There were many panels on wearables. I’m a bit of a Grinch here, sorry. Apple’s Watch aside, I think the idea of wearable technology is cool, but I don’t see consumers flocking for this. Yes, there will be commercial applications like Nike Golf or putting sensors on delivery-people, etc. But, so many new sensors and APIs from the iPhone replace so many of the first generation trackers. So, I’m a wearables Grinch. I know, I know. But, I need to be convinced, so I’m open to your best arguments. Send ‘em my way!
The LP View of VC Today: Feel free to stop reading here. Yes, more conversations with the LP world. What I took away from my time here was that (1) there’s a lot of money waiting on the sidelines to invest in venture and/or directly in startups; (2) many LPs are concerned about the valuations that VCs are paying right now; (3) yet they remain excited about the early stages of venture, which are not impacted by macro concerns. Innovation never stops. Most of all, LPs seem to be obsessed with either networking their way into investing in the biggest brand name funds; if they can’t, they try to find strategic value (stage, sector, geography) with the hopes of balancing their own portfolios. They’re also more and more interested in Opportunity Funds to invest in follow-on rounds and take some pro-rata, as well as investing directly into companies alongside their VC fund managers. (The issue that arises here is many of these FoF or institutions aren’t set up to conduct their own due diligence in a short period of time to vet the opportunities, but nevertheless, the existence of VCs in many cases is also being called into question. It’s the wild west!)
After my last mobile gig ended, I also took some time to reevaluate what firms I was working with. While I’ve had a bumpy ride into the world of venture, I have also been super lucky to work with friends at great firms. As Labor Day rolled around, I had the chance to deepen some of those relationships as Venture Advisors to two firms — GGV and Bullpen Capital. They’re both at very different stages of the market, so it works. And, it’s a blast. I’ll write more about the transition and experience soon.
In my work with Bullpen, we work in the early-stages of the market, right before companies are ready to talk to the larger, more traditional funds. You may have picked up people using all kinds of labels, and even I’ll admit, it’s tiring and hard to keep straight. There are folks who invest early, folks who invest a bit later, and plenty of folks who invest when things are working. Over the summer, my colleague Paul Martino had an idea — convene a conference on this very topic, and let’s discuss it, and figure it out. As is the case with many moves, Martino was right — I’m pleased to announce that on Tuesday, December 2 in San Francisco, Vator, Venture51, and Bullpen are co-hosting the first-ever “Post Seed Conference,” gathering the best and brightest minds on the current state of early-stage financing for a one-day, single-track event for investors, founders, limited partners, and members of the startup, technology, and financial press.
Learn more here and buy your tickets now: beta.postseed.co (contents in this link is evolving, but you can order tickets now; we also created a ticket for founders priced at $349.)
When I say the “best and brightest minds” with respect to early stage financing, I mean it. We have three (3) keynote 1:1 sessions lined up, and these folks are some of the best in the game: One-on-one fireside chats with Keith Rabois, Naval Ravikant, and Chris Dixon. We are going to dig into every contested aspect of the early-stage ecosystem today — notes, caps, signaling, upstream financing, syndicates, and more. (I’m going to close the event with a 1:1 with Naval, which I’m of course really excited about. We all know Keith is going to say some awesome stuff, and Chris is certainly one of the most original thinkers on financing out there. And, these are just the keynotes.)
Additionally, we’ll have a number of panels as well, and among the topics we’re set to cover (full agenda will be posted soon):
How are leading early-stage VCs thinking about the gap between seed and Series A, and navigating through it?
Crowdfunding platforms are helping to create this gap, but can they also help to fill it with capital?
What does it take to get a true Series A round done in 2015?
Will $5 million be the new $500k in the Internet of Things and Wearables Era?
Learn whether pro rata is a right or privilege.
If there’s a bubble, how do you not pay up?
I’m happy to answer any questions if you have ‘em. If you use AngelList, invest in early-stage companies, are a founder or thinking of starting a company, if you’re a limited partner in the asset class or thinking about investing in the category, or if you cover the early-stage startup world, this conference will be a great way to not only dial into today’s current issues, but also meet with a great set of speakers and panelists and press to meet face-to-face. On behalf of Bullpen, hope you can make it.
** Update: I rec’d a lot of email/DMs on this one. My takeaway from this is there’s a mismatch of expectations when founders meet VCs. The founders may perceive they’ve raised Seed and are “going for A,” while VCs may perceive that same company to have already raised an A and, therefore, expect B-level metrics.
Monday night was a night on Twitter I did not expect. It’s easy to say that all the naming of rounds (seeds vs A vs ____) is semantic and tired — that’s true. What is interesting (to me), however, is the general knowledge gap between bigger institutional funds and the seed ecosystem at large. If you open this tweet and click through the various threads, the key lesson for me is that founders at the seed stage should be aware of how a larger VC firm will evaluate them based on the amount of money they’ve raised to date.
In particular, and this is just one person’s POV, but one of the largest, most public VCs said he viewed startups that took on around $3m or more in seed funding or notes had already raised their “A round.” Yes, semantics again, but founders are obsessed with these monikers, so everyone else is, too. A step further, for seeded companies that have raised this or more, a VC firm may benchmark that opportunity against other Series B deals they’ve done and/or are evaluating at that time.
This is all important today because (1) most people who aren’t on the inside don’t understand these goalposts; and (2) founders are operating in a climate where they can raise many rounds within a set of rolling closes of notes with caps. So, lamenting about what rounds are named misses the main point: Now that this knowledge has been made public, how will it impact how much founders raise, will it impact seed investors from continuing to invest in or bridge their companies? Whether or not $3m is the right benchmark, people are searching for guidance, and in the absence of perfect information or standardized milestones for companies to hit, a discussion like tonight’s helps shine a spotlight on companies who raise too much in the seed round.
It is not about the semantics. That may be obvious to some, but it’s great to have a leader in the world of VC just come out and say it so clearly. Not many people would.
A few weeks ago, I was invited to Cendana Capital’s & SVB’s annual “LP/GP Summit” at the Bloomberg offices in San Francisco. I asked the head of Cendana if I could briefly summarize my takeaways of the event (without ascribing any comments made on stage to anyone in particular), and Michael graciously agreed. As I am new to the investing game and the smallest player by every standard, these types events are really impactful for me. Please note, Cendana is focused on early-stage VC or microVC, and less so on the bigger funds. I’m like a sponge trying to soak up everything I hear. So, here are “The Big Takeaways” for me:
[Before I do this, a few big disclaimers as inevitably people will read this with all different perspectives and points of view. What’s below does not necessarily apply broadly -- rather, it’s based on what I’ve observed. Many funds have different relationships with their LPs. Therefore, these are my observations, and only that -- my perspective on what I’ve noticed, and it’s likely to be at odds with what others may have seen.]
Today, everyone wants to invest directly./ This was the biggest theme of the day, and as I’ve been mentioning on Twitter, everyone and their parents want to invest directly into private companies. Crowdfunding, AngelList, Kickstarter, and so on. By now, we all now private companies can stay private longer, so as the opportunity set in the private sector grows, money on the sidelines is getting hungry. And, I mean HUNGRY. LPs increasingly want to not just follow-on into their GP investments, they want to co-invest at the time of the original check. // The inverse of “everyone wanting to invest directly” is that what people are saying is: “I don’t want to pay fees.” This can cause tension between LPs and GPs, and brings up all sorts of issues around which LPs are shown opportunities from which GPs, and so forth. There’s something broken in the VC fund model (fees or carry, or both) that’s aggravating LPs at a time when the real growth of new companies is captured by private investors.
LPs expect GPs to design their funds to be ahead of the curve. / It’s 2014. Venture has been through a few industry corrections and every smart person I talk to about this expect a few more. In a somewhat similar fashion as GPs scout the landscape for founders to back, so to do LPs scout for GPs to invest with (and alongside of). What does this mean in reality? It means larger funds (over $100M) might be expected to have budgeted fees instead of fees based on a percentage of total capital managed. Some larger firms have done this a while ago, and we should expect more will. LPs are looking for GPs to commit even more of their own capital to the fund. // On top of this, LPs seem to be digging into just “who” are GPs they’re partnering with, how they interact, how long they’ve known each other. One LP said that a common mistake in meetings was to notice GPs talking over each other. I chuckled at that one.
***A few other observations***
A dollar travels far before it reaches a founder./ Overall, now a week or so after the event, I find myself still thinking about how far a dollar travels to reach a founder. This stuff is all over the Internet in detail if someone wants to dig into it, but I’ll offer up a basic example to illustrate: Consider back to when you were in high school, working over the summer to earn some money toward college tuition. Those tuition dollars (along with other university revenues, like donations) go into the school’s endowment, which in turn hires sophisticated investment professionals to manage the endowment and grow it. One of the ways an endowment management team can grow the pie is by allocating a portion of its assets into riskier categories, such as venture capital. From there, they allocate funds directly to VC firms whose names you’d recognize and/or into “Fund of Funds” (FoF) which in turn invest those dollars (for a fee and carry rights) to VC firms. The VCs take fees on the money they manage and then allocate that pool to founders — though “some” also invest in smaller funds, if you can believe it. // In the previous example, you can replace a university’s endowment with a range of institutions or organizations which manage big sums of dough — corporations, sovereign wealth funds, pension funds, hedge funds, governments, wealth families, and so forth. However the dollar reaches these funds, it then is allocated and depleted a bit with fees every time new hands touch it. In the event a single dollar isn’t returned, it’s OK because it’s usually a small portion of the overall cash the original lender manages; but, when a single dollar put into Facebook when it was worth $100M is returned, it’s the type of money multiplier rarely seen.
Given that context, here are few things I’d point out that happen in the world of venture that may not be totally obvious to folks who observe, especially the founders who are busy team-building, product-building, and growing the company:
It’s easy to assume VCs are just investing other peoples’ money. There’s some truth to it, but in most funds, the LPs have the GPs also commit their own money to the fund, and that number seems to be increasing.
When there’s a big exit or uptick in the price of a company, the press and chattering class can easily latch on to what the estimated stake of a fund’s rake is. For instance, when Facebook was creeping up to $50Bn in the private markets and equity shareholders were selling some stake, people may have thought Fund X owned $Y because of some estimate of percentage ownership. That’s only part of the story — those proceeds are mainly sent to the LPs, usually 80%, and the GPs can take home the remaining 20%, give or take.
Investing is definitely easier than founding and/or building a company, but that doesn’t mean it’s a cushy or easy job. Yes, there are perks, but there is a lot of pressure, uncertainty, long feedback loops, and if someone doesn’t do well, the post-VC career options can taste a bit overripe. I don’t think anyone needs to feel sorry for a VC, but saying it’s an easy job doesn’t match reality.
Historically, lenders aren’t viewed favorably. In today’s climate, investors have become more public to share their thinking but also to help differentiate their offering beyond the same dollar everyone else has. That, combined with all new classes of early-stage investors and more diverse pools of financing available to founders combine to put a bright spotlight on VC firms that are not performing and/or not behaving well and/or who can’t raise future funds. There’s probably a ton of legacy stuff that still needs to shake out, a lot of which likely originated way before I became interested in this stuff. And, while I would welcome things getting better, I do find the chatter online against investors to be different from the reality I’ve seen firsthand. Yes, there are unsavory actors and plenty of time-crunched distracted VCs, but overwhelmingly I see professional investors who work basically around the clock to help their companies, to help out people in the ecosystem, and to advance the careers of the executives and recruits around them. That story isn’t often told, but maybe that will change as time carries on.
Snapchat is the subject of more tech chatter (again!) because of the popularity of “Stories” and this video describing all the facets of what makes the product for young people today. You must watch this video. I started thinking more about Snapchat today, and I showed my wife a few of the “Stories” from today — the Stanford vs Notre Dame game (she works at the University) and the Hot Air Balloon contest. She’s heard of Snapchat, but doesn’t know what it is — she watched the stories and figured out she needed to keep her finger on the screen. She loved them. Stories are, no doubt, more dynamic, real-time, and engaging/real than what we’ve been trained to see when we visit Facebook. So, all of this got me thinking again:
Snapchat V1 May Have Been A Fluke, But “Stories” Prove Product Genius: My wife asked me today, “What are “Stories?” I showed her on and then tweeted this line: “Snapchat Stories = mobile-native, user-generated, crowdsourced video clips curated for a current event = the most engaging real-time media.” Think about this. Snapchat has the mobile broadcast DNA of Twitter + Instagram, the photosharing & messaging of Facebook & Whatsapp, and the original, user-generated videos of Vine and YouTube. Wow. Power play. Who knows what motivated the founders to create the initial engagement hook of their first version. Maybe genius, maybe a fluke. Stories prove they’re product geniuses. The content in Stories is just right.
The Search For “The Instagram Of Video.”Remember Viddy? A few investors certainly do. At that time, people assumed Instagram’s success would open the door for a video counterpart, so we saw SocialCam, Vine, and Instagram included video. Earlier today, I tweeted: “Turns out “The Instagram for Video” wasn’t SocialCam or Viddy or Vine or even Instagram. It was Snapchat.” A clunky line, but you get the idea. Of course, all of this could be moot if the company won’t make the turn from product sensation into business. Admittedly, I thought at the start of 2014 that Snapchat would be acquired this year because the market was hot, they could get Whatsapp-style bids with stocks surging, and because going through the revenue game could present a risk. So, I came out and wrote “Prediction: Snapchat Will Be Acquired In 2014.” Looks like that post will be wrong ;-)
The idea of a connected car can be intoxicating. As I have written about previously, time inside the car is a frontier for consumer attention, content, and experiences. It will transform, no doubt – but how we get there is less certain. Lately, the chatter is around having the big phone makers to port their current mobile operating systems to our car’s dash board. Sounds reasonable, until we consider that (1) car manufacturers may want to fiddle with their cars’ APIs and interfaces, and (2) there will most certainly be strict government laws around what types of apps could appear on in-dash systems.
Through some of my experiences with startups that create products primarily used in the car, these are issues I’ve spent a bit of time chewing on. Earlier this year, I was stopped by a cop on a motorcycle on a quiet street by my house because I touched my phone to adjust the volume while stopped at a stop sign. Luckily, I didn’t get a ticket and I didn’t realize it was illegal to even touch your phone while driving. Of course, millions break this rule daily, but I believe all parties involved want to find a solution and interface that drivers can interact with their phone while driving safely.
I met the CEO, Doug, a few times, and it was clear that he and his founder had deep technical experience. Their idea, Navdy, was a little piece of hardware (the size of a bigger Android phone) that held a larger piece of glass and prism. These components sit on your car’s dash, and transmit data from key apps from your phone (maps, music, communications) through the glass and prism into a heads-up display that appears to float on your windshield. Check out the video, it’s kind of cool:
Navdy is not just the hardware — it is really a new UI for the driving experience. Navdy is creating a new UI for the driving experience, one that includes a HUD, touch less gestures and glance able apps. Today’s UI in the car is terrible. Knobs, buttons and touch screens (of any size) force you to take your eyes off the road. With a smartphone: when a phone call comes in your nav app disappears and worse you then have audio turn by turn directions interrupting your conversation. Navdy fixes these issues with a UX that is dramatically better.
From an investment point of view, this is going to be a challenge. I invested a bit earlier than I normally do, and I was happy to see some great institutional investors eventually come into the round. I have no doubt that Doug and his team will build a great hardware solution, taking data from my phone and transmitting to Navdy and letting me use a mix of gesture control and voice control to interact with my phone. The precise bet here, however, is that while the phone and car makers will want to control the interface and experience of drivers, my belief is consumers will want data and control to rest on their phone, and Navdy gives them a way to interact with their phone while driving. This one will take a while to bake, but that’s OK – that’s what it’s all about, and Doug has been embattled before as an entrepreneur, which made it even easier to get involved.
Because of a range of factors focusing consumer attention on mobile-to-offline models, I was curious how some of the companies we recognize were funded according to their footprint at the time. Luckily, I happen to know a bunch of them personally, so I emailed them about their size when their Series A’s closed. Here, in these models, scaling geographies is the execution game, and “city launchers” are the growth hackers of this world. Here’s an edited listing of what they said:
Uber: As reference, keep in mind Uber was in two (2) cities at the time of their $11m Series A, and about 8 for their $33m Series B.
Postmates was in five (5) for their $5m Series A ($5m round); six (6) cities for their $16m Series B; today, they’re at 15 on track for 26 by end of year.
DoorDash was in one big area (the Bay Area) or what could be called two cities (Peninsula and San Jose) for its $15m Series A, and are currently expanding geographically.
TaskRabbit raised a $5m Series A but I can’t find out how many cities they were in at the time.
Lyft raised a $6m Series A while it was Zimride on a different model [link].
Caviar raised a $15m Series A with four (4) cities but was, at that time, on a pace to add cities quickly. (They’ve been acquired by Square.)
OrderAhead is not public about their financing, but worth looking up if you’re curious about this stuff.
Sidecar was just in San Francisco (and plotting Seattle) when they raised a $10m Series A.
Hired was just about to launch its second (2nd) city at the time of their $15m Series A, and has actively hired a small handful of ex-Uber employees as it grows.
Shyp raised a $10m Series A operating in one city, San Francisco.
Munchery was just in San Francisco for all rounds of funding (to date).
Instacart raised a $8m Series A with two (2) cities.
Sprig and Spoonrocket raised $10m Series A rounds just operating in San Francisco.
Redacted: A number of parking-related startups have raised smaller Series A rounds being in one city, and will likely raise more.)
** Naturally, I’m going to miss some startups on this list, so if you have additions/corrections, please comment below and let me know. **