Venture Capital Archives

Corrective Medicine, Just What The Doctor Ordered

As it relates to startups (and investing in them), the past week’s stock market correction (which still may be going) is just what the doctor ordered. Who knows why it happened exactly — sending a message to the Fed, international market fears, people realizing P/Es were too high, blah blah blah….

The net effect now after some stability is the correction was medicine everyone needed. More specifically, I think the correction and intense social & traditional media focus on it actually makes this better for everyone in the startup ecosystem:

First, writers, analysts, bloggers, and arm chair Twitter economists now have more to write about that timely, global, and more hard-nosed. They can go up to a founder or investor and simply ask “Well, did you crap your pants?” The press has been somewhat reluctant to balance cheerleading entrepreneurship with asking key fundamental questions.

Second, investors can now leverage recent market gyrations to negotiate down valuations. For years, investors couldn’t do this at the risk of losing a deal or offending a founder, but now everyone understands that a bit more balanced has been restored to the ecosystem, and investors (may) get some lower prices.

And, Third, founders avoided catastrophe. If the market kept sliding, many investors would’ve been fine (with bruised portfolio metrics), and writers/bloggers would’ve had a field day, but entrepreneurs, founders, and very early-stage employees (and frankly many rank and file) would’ve been in a real jam. Runways could’ve started to compress. People could’ve jumped ship to work at a safer job. This jolt was a nice reality check and doesn’t seem to affect the long-term positive outlook for technology seeping into the world.

For these three reasons, the recent market volatility may just have been exactly what the doctor ordered.

We’re Finally Learning More About Uber’s Platform Strategy


In the SF/Valley bubble we live in, we are finally learning more about Uber. For years, we have debated: Will the on-demand industry consolidate? As part of that eventual consolidation, what will Uber’s role be? And, if and when they expand the platform from rides to X, Y, and Z, will those services be branded as Uber’s or a sub-brand? Will they be housed inside Uber’s core app, or as a separate app in a constellation of interrelated apps? (Read this old post on these questions vis a vis Uber.)

Of course, Uber could change in the future, but just in the last few days, we have learned a few things: That Uber may elect to build things themselves (because they can execute) versus paying higher prices and going through the trouble of integrating; that Uber will likely place more buttons on the top nav bar in the app (see picture), perhaps even an integration with mega-popular dating app Tinder (which makes sense); and that those experiences will be managed inside the main Uber app container, controlling the brand experience (and checkout, payment) for the user.

As I wrote a few days ago re: UberEATS launching in San Francisco — which is noteworthy given this is also the epicenter of (too?) many food-delivery startups, many of them richly backed by venture capital. Not since Facebook have we seen a company execute at the level Uber has. They react to market opportunities and PR crises with incredible speed and precision. Now, they’re bringing the Uber brand to you in more ways than one.

Many people by now have heard the line that “Uber wants to have a second business line by the time it IPOs.” It remains to be seen if food will move the needle for them, as this is more of a lead-gen model in the likes of Postmates, DoorDash, and Caviar (powered by Square) versus the full operational costs of an integrated model like Sprig or Munchery. Beyond the “food button” on their app, it’s fun to imagine what other buttons we might envision. Beyond food and transport, it’s hard to imagine what is needed on a daily basis and in the moment — though the suggestion of Tinder is appealing, and one can see the connection from early Uber backer Benchmark Capital, which recently became an investor in Tinder (with Matt Cohler joining the BoD). Maybe after that, they open a store, or provide sundries, or anything you’d order from Amazon, or Target, or Whole Foods?

Facebook scooped up Instagram prior to their public offering during a time when pre-IPO concerns included the company’s mobile exposure. For Uber, which should now go public in 2016, the question to ask is: What is their Instagram? What is the move or market needed to show long-term public investors the promise of the underlying platform beyond transportation? And, will it be acquired or built from within? I don’t know what the answers are, but I do believe these are the questions to ask.

[As a post-script, you may tell I’m back talking about Uber more. For years, I’ve been fascinated by how this company intersects with our physical world. I was going to write a book about this, and then canned the idea, but I’m going to pick up the idea again in some form — maybe not a book, but just more posts about it. I hope you don’t mind.]

The Chilly Freeze For On-Demand Startups

We will talk about this topic among others at The On Demand Conference in NYC on September 15, Register Here. We are also running our second contest for the best B2B on-demand startup, more details here!

My, how things can change. When we did the inaugural On-Demand Conference back in May 2015, everything was hot. Now, gearing up to the second installment in September in NYC, things are — shall we say — a wee bit chillier. And, rightfully so. In a few months, we’ve seen high-profile companies broadly in the sector nearly fold overnight, we have yet to see the big rollup consolidation strategies that people wish would happen, and the culture of copycat models is bringing more and more founders into red ocean markets like food delivery.

Investors are applying more scrutiny toward on-demand startups, asking flavors of the following questions: How frequent is the consumer use case? What is the payback period when opening a new geography? What do the unit economics look like, and can they modeled at scale? Does the team understand they should balance unit economics and growth by city to make sure they don’t run out of money? We haven’t seen much M&A in sector, so can this company go the distance? How can the team expand the product/service offering if the service grows? With UberEATS now in San Francisco, the backyard to many well-funded food delivery apps, could Uber crush the opportunity entirely? And, who might follow into the next round of funding should the team set out to do what they want to do?

These are MUCH harder questions than VCs were asking before. Welcome to the new world. Now, that’s not to say there won’t be some companies which continue to fetch large rounds, or that there won’t be on-demand concepts that attract funding in different parts of the world or in different product categories (like healthcare). The concept is bigger than food and transportation, though those two are clearly the consumer drivers.

Luckily for us, the purpose of these conferences isn’t to promote a sector, but rather to gather the most thoughtful minds among company builders and investors to tackle the most pressing issues of the day. So, in September in NYC, that will be no different. You can learn more about the NYC event on September 15 here, and on the VC panel in particular, friends Steve Schlafman (RRE), Kanyi Maqubela (Collaborative), Anu Duggal (Female Founders Fund), and David Tisch (BoxGroup) will debate these and other issues facing on-demand startups in the seed and Series A/B stages.

Register here for the September event in NYC. Unfortunately, I am unable to attend in September now, as I was very much looking forward to seeing everyone, meeting all the new founders with new concepts, and kicking off the day’s activities with a fireside chat with USV’s Albert Wenger, but I can’t make this trip. So, I will give away my ticket to one person who really wants to attend. What I ask for is this — tweet out a link to this event and mention me @Semil on twitter, and my co-organizers will pick one lucky winner to attend the event in my place!

Seed Founders, Beware The Syndicate Shenanigans

As any reader of this blog would know, I am a huge AngelList fan. I have run a few Syndicates now over the past two years. Most of them have cleared, but a few haven’t. I could’ve run a lot more, but I intentionally elected to be very careful about how and when I bring syndicate opportunities to the platform (1) because I’m simply new to investing overall, and I didn’t want to bring people into the fold with me too early; and (2) because I needed to learn AngelList’s platform myself, over time, and learn in between each syndicate to get better.

When I present the AngelList option to a founder, I always educate them first on all of their options for their fundraise. I like to lay out the options and let the CEO decide. Many times, the CEO has elected to forego the AngelList option, citing either privacy concerns, or signaling concerns, or wanting to wait; at other times, they dive right in, want to learn the process, and have so far been very happy.

Lately however, and why I’m writing this post, I’m encountering investors in the angel and seed stages who are up to some tricks, what I like to call “The Syndicate Shenanigans.” The classic move goes something like this, with the investor offering to the founder: “I would like to invest X, but conditional upon me taking this to AngelList and putting it in my Syndicate for 4-6x.” The founder in this case is faced with a dilemma, and this post is targeted both at the founder and also those who participate and follow Syndicates on AngelList. To be clear, these can work well if done right, but it’s smart to understand the risks before jumping into the fray:

To Those Who Follow Syndicates: First, determine if you want to automatically follow any deal of a Syndicate leader, or whether you want to pick deal by deal. If you blindly follow, your money gets priority, so just know you’re along for the ride; if you go deal-by-deal, try to understand why the Syndicate lead or founder wasn’t able to fill up the round privately. Second, generally speaking, you may want to monitor the deal pace at which the Syndicate lead is bringing opportunities to the platform.

To Founders Offered Such Terms: This may put you in a tough spot. You want the money, but the conditions attached to it could be confusing. Sometimes investors will say they have a “minimum check size” to make the math work in their own fund model, so when an investor offers to commit with the condition of bolting on a Syndicate, this is another flavor of the line: “We have a minimum check.” In this case, they likely have an economic arrangement on AngelList that gives them a percentage of carried interest on top of the money they collect for you. You have some options here. First, learn about AngelList and Syndicates, and make sure you know whether the particular Syndicate offered to you would be private or public; understand the process and how long it could take (2-4 weeks to clear); and understand how the Syndicate lead (who will be named on your cap table directly) will market your company to those other investors that you’ll never meet.

I want to be clear that (1) I love AngelList and (2) have done this myself, but (3) that making AngelList a condition of an early-stage check isn’t bad behavior, but should be done so in a way that educates the founder about his or her option, and less about throwing down a conditional on the team. Happy to answer any questions you may have and/or refer you to CEOs I’ve worked with who’ve gone through the platform for a Syndicate.

The Confluence Of Trends Making esports Go Mainstream

Like many others nowadays, I’m fascinated by the phenomena around “esports,” which can mean watching other people play video games or code or do both, either in person, or online, or on one’s phone. I had to laugh when Startup L Jackson tweeted “If one more VC discovers eSports this week & starts tweeting about it, I am going to come up with an ultimatum. And it will not be pleasant,” because it’s true…but there is good reason. I was catching up on some reading today and realized there are actually a confluence of non-connected trends which form to make the present day fascination quite logical:

One, the youngest millennials are now right in the middle of their teenage years, right around when they can almost drive a car. This generation entered the world when mainstream gaming consoles hit the market and started to invade the home, with the Nintendo Entertainment Systems coming to the U.S. in 1986, the Sega Genesis in 1989, Sony’s Playstation in 1994, and the XBox in 2001. Like I did, many folks owned or tried every system, and they popularized casual video game play.

Two, the culture around these home gaming systems is that only 2-4 people could play at a time. If you grew up around these consoles, you would clearly remember waiting your turn, and while you waited, you would watch other people play the same game you wanted to play. You’d just sit there. You didn’t have a phone to distract you or the Internet at home to jump on. Turns out “watching other people play video games” is randomly engrained in millennial muscle memory because everyone exhibited the behavior. This turned out to be inherently social behavior, waiting in tournaments to play the next round of EA Sports Madden or NHL, or trying to win Zelda or Metroid.

Three, over half of millennials grew up in an age where network TV was on the decline. Today, for many of them, network TV is wholly irrelevant. Instead, they stream content online, pay for subscriptions, buy individual shows, and watch shows on-demand. While mobile phones and networks take the place (in terms of attention) of TV, there are hours in the day folks can devote to this and they certainly do.

Four, the infrastructure required to support a range of esports activities has become robust enough to handle the traffic. People can now broadcast and/or consume esports media from home, networks like and others have cropped up and amassed large audiences. Mobile phones, data networks, and video channels are also more robust, of course. MLB recently announced it was spinning out its quietly robust digital streaming and hosting business, a unit which could be worth many billions of dollars more than it is today. As livestreaming technologies have demonstrated this year alone, social networks like Twitter are ready to provide users with live content (a la Periscope) and to support those streams as a piece of audience development and engagement.

Five, the cultural interconnectedness from a tech point of view between Asia and the U.S. is also responsible for the trend hitting the west. The culture of watching others play video games in larger audiences began in parts of Asia, which made sense because that’s where the home consoles were originally developed and released, before shipping to the west. Like messaging platforms today, the esports behavior is older and just took a bit longer to incubate here in the west, but now these micro-cultures have converged.

Sixth, the global rise in the importance of and celebrity around computer literacy is timed in such a way that it doesn’t make the act of participating in esports seem like a waste of time. Rather, it can be seen as both educational and social, as both entertainment and interactive.

And, there you have it, all of these forces put into a blender, and it all explains why esports is so popular, why sports and media networks are not only allocating mindshare and budgets to it, but also doing this for derivate products, such as gaming networks which let fans bet on esports participants, among other parlays. It’s been almost a year since Microsoft acquired Minecraft and when Amazon acquired Twitch, and with most technology investors being a bit older than the millennial generation, most of them have enough nostalgia to understand the behavior and recognize the power in the mass audience aggregation when they see events like this one. Like Facebook and Instagram and Snapchat aggregate audience attention on the web and on phones, esports is starting to do the same thing in the same channels, but also in real life, where kids of all ages collide, compete, and make new friends. It’s almost like an entirely new social network, and that’s what gets people excited — and rightfully so.

Wrapping Up Another Summer Of StrictlyVC Posts

Well, I wrapped up another summer tour with StrictlyVC, and it was a blast. To quickly recap, there are range of Q&As over the three week, capped off by three columns on my experiences administering and raising small funds.

For interested in venture in China, make sure to read more about DCM’s Jeff Lee and GGV’s Jenny Lee (no relation); for those who want to hear from former Twitter execs who are now VCs, tune into what Homebrew’s Satya Patel and Foundation Capital’s Anamitra Banerjee have to say; the early-stage investors weigh in on today’s environment, including NYC’s Notation Capital (one of the smallest and earliest microVCs); Javelin’s Jed Katz, who isn’t shy about warning of the excesses in seed funding; Susa’s Leo Polovets who talks about why brand is so critical; Kristen Koh Goldstein chimes in about her role in the ecosystem as an investor and founder; and startup personalities Ryan Hoover (of Product Hunt) and Startup L. Jackson (of Twitter fame) take the opportunity to share their views on today’s startup ecosystem.

On Friday’s, I wrote a few posts about recent happenings in the world of venture, first touching on the benefits and costs of LPs who want to invest directly into startups; second, I examine tension between the inefficient costs of a small venture fund versus the importance of being able to invest early into new companies; and finally, I explored the decisions small funds face as they grow, or try to grow, as I am doing now.

It will great to have Connie back as everyone gears up for the fall rush. Thanks again for the opportunity!

When Someone Asks Me About Series A, Now I’ll Just Share This Post

With the explosion of seed investors and seed financings, it’s been fascinating to see the psychology form around “Getting To The Series A.” It’s as if it is a huge marker everyone wants to achieve, and it makes sense. Yet, I’ve found I keep having the same conversation over and over again with seed founders who “think” they’re preparing for A when, in reality, they should be preparing very basic M&A discussions (if they’re lucky).

To that end, I wrote a series of posts about (1) some universal ground rules for preparing for the Series A and (2) exploring alternatives to financing when the Series A doesn’t arrive. The tweets and posts around this led to a vibrant online discussion, which led to a live event organized by Bloomberg BETA last week.

Roy Bahat from BETA took the lead and I moderated the second discussion. We jointly invited Rebecca Lynn from Canvas, Brian O’Malley from Accel, Josh Elman from Greylock, Maha Ibrahim from Canaan, and Hunter Walk from Homebrew. It’s a two-part discussion, each part about 60 minutes. I am not going to have the audio transcribed because I want folks to listen to all 120 minutes of this. No shortcuts on this one. Part of the reason I was glad this came together is because it comes up so much in conversation, I grew tired of explaining it or writing about it. Now, thanks to everyone who participated, I can just share a link to this post and the audio instead!

Seed to Series A: Myths of Raising an A from BLOOMBERG BETA on Vimeo.

Seed to Series A: New Realities of Raising an A from BLOOMBERG BETA on Vimeo.

The On-Demand Conference Expands To New York City

Friends in and around New York City — please mark your calendars for September 15 in downtown in NYC: The On-Demand Conference hits the Big Apple: My co-conspirators in this effort — Pascal from Checkr and the entire crew from Tradecraft (including Misha) — digested feedback from Version 1 and gained the conviction to go for V2.

Back in May, just three months ago, the inaugural “On-Demand Conference” was a hit in San Francisco. That conference concluded with a lively ending where a debate among investors brewed over the issues facing contract workers in the gig economy. [video archive]

Now, just three months later, it’s as if we live in a new world. Some state governments across the country have issues preliminary rulings about worker classification; a parade of well-funded on-demand startups have made headlines by proactively converting some or all of their contractors to W-2′s; presidential candidates running for office in 2016 have brought the topic into debates and headlines; and all of it has come together as a bonafide mainstream news topic.

While things are changing quickly, some of the world’s best venture capitalists have grown wary of the sector. Some have warned that on-demand consumer solutions are saturated, and that not everything needs to be on-demand, and that the high capital intensity in scaling (often without technology moats) all make for a dubious investment climate.

These are are, indeed, valid concerns. Just as the last conference generated substantive debate and featured an entire day of highly-focused content from the startups and operators building these companies, our aim with Act 2 is to double-down on our organizational efforts and create the space where the most pressing issues can be surfaced and debated.

To that end, we have a All-Star East Coast lineup for the event. Click here to see the agenda and browse through the names. We will have managers and GMs from companies like Uber, Instacart, Postmates and many more; we will have some of NYC’s best investor minds on stage; and we will have tech media representing The New York Times, VentureBeat, Scientific American, Forbes, and more.

Finally, and a bit selfishly, I”m excited to share that I will open up the day’s events in a fireside chat with Albert Wenger from Union Square Ventures. For those of you who read Continuations, Albert’s blog, you’ll know he’s written extensively about Uber and ridesharing technologies, about how workers are classified and treated, and his argument to call for Universal Basic Income as a policy in anticipation of a world that may be automated by advancements in technology.

It all has the makings for a fantastic event. I’m looking forward to it. For more information and to register, click here.

The “Bang Bang” Round, Inspired By Louis C.K.

With just under three years of seed-stage investing experience under my belt, I’ve stumbled upon a behavior I haven’t seen yet. Homebrew’s Satya Patel captured the phenomena in a tweet a few days ago, above. I have seen this first-hand. It can happen from either (1) pre-seed close to a seed round; or (2) from a seed round close to a pre-emptive Series A, all within weeks if not days while the previous round’s ink is still drying.

In Scenario #1, the pre-seed round is done at a price which should really be reserved for the seed round, and this can often put the founder/company in an awkward auction position within seed. Amazingly, even some standard VCs will dip their toes into the water and test things out here. In Scenario #2, mid-sized funds start to see deal heat forming as a seed round closes and hear about a team or traction, they can jump in, slap down a real check, and jack up the valuation to satisfy their ownership requirements.

Yet again, a great time to be a founder…a founder that’s raising money early. The whole phenomena immediately reminded me of a Louis C.K. episode, where he and his brother skip going to the gym in order to go have two lunches in succession — he calls it the “Bang Bang,” (note, this is his language, not mine) where you eat at one place, and then immediately go somewhere else to eat another meal. In SF and the Valley in 2015, there hors d’oeuvres are being passed around, and a lot of people are happily stuffing their faces. Here’s the short clip from Louis below:

What’s In A Name? On The Cap Table, It’s Everything Or Nothing

Being very close to the formation stage of startups and their financings, one trend I’ve noticed is, increasingly, founders have a rough idea in mind of the mix of “branded” vs “non-branded” money they want on their cap table. For instance, a pair of founders who receive high demand from investors to get involved, those founders may want a specific name brand on the cap table and, after securing that, just seek to top off the round however it can be done with the least amount of time and pain. They tend to go after the brand — either just a big name that adds credibility, or someone who can help the founders in a specific space.

This means, even at seed, an investor’s brand matters a great deal. The brand helps the investor get the dealflow, get his/her email returned, get the phone call, and gets the ability to have a round re-opened for them, for extra room to be made for them.

This is what happens before any Series A.

Most seeded companies don’t make it to Series A. For those who do, most have to really fight for it. It takes time and is grueling. For others, there are more offers to invest then there’s room. And, this is where it gets very serious for most VC firms downstream — whether Series A, B, and especially growth stage investors. Those high-flying, competitive Series A companies may, in their lives, want to have a branded VC firm on their cap table — who doesn’t want Sequoia listed as their Series A investor, right? After that, maybe one more, a reputable firm like IVP.

And, once the founders have that signal — “Fred Wilson is on our board” — the rest of the money they need likely has to be very value-add and/or strategic, otherwise, they are growing increasingly savvy about creating layers to separate the companies from their investors. For instance, this is why early-stage investors in companies who have earned the trust of founders can act as de-facto investment bankers for the companies, creating SPVs with generous fees and carry arrangements to allow their LPs to invest somewhat indirectly in the company.

To quote Shakespeare, “A rose by any other name would smell as sweet.” And, increasingly, that is how founders who are in demand view money after they have the social proof and signal in hand. For larger firms and especially those downstream, as founders have more choices and need less money, how will they get their names directly on the cap table? That is a question LPs and later-stage funds will have to ask over the next decade.

Haywire is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2015 Semil Shah.

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