Archive for the ‘Venture Capital’ Category
I should preface this post with the caveat that a VC describing what it takes to be a good VC runs the obvious risk of falling into a trap of vanity and lack of self-awareness. I hope I haven’t, but you be the judge…
There’s been a real uproar over . In it Dunn asserts (I’m paraphrasing here and I’d encourage you to go read the full post) that 98% of VCs suck. And his last line pretty much sums up his feelings: “98% of VCs who read this post self-identify as being in the top 2%. The other 2% are actually the top 2%.” There have been some good rebuttals of his overall critique – and especially of the 98/2% split (which, interesting, is perhaps an admission that certainly by track record, and implicitly by some of the other critiques Andy offers, there is some split between good and bad VCs -or Dumb and Not Dumb in Andy’ by the way, his math is completely wrong – the majority of venture returns are generated by an order of magnitude more than 2% of VC firms). I particularly like what Mark Suster had to say on the topic
– especially his opening point, about liking the VCs you know and hating the rest (Andy calls out his own VCs as being great in his post, to Mark’s point).
But this post isn’t a further rebuttal to Andy. Instead I’m interested in starting a conversation around what makes a good VC – specifically from an entrepreneurs perspective. Why might an entrepreneur choose to work with one VC over another (and as Andy suggests in his post there’s plenty of information out there to help entrepreneurs make informed choices). And in what ways can VCs actually be impactful on a company’s business (Andy suggests that this is by staying out of the way, although implicitly he suggests that his own VCs actually are quite involved with his company – I strongly disagree that being uninvolved is the answer).
Here are a few idea
A couple of years ago I posted about what I thought would be the “new era of Venture Capital.” Specifically I was predicting that we’d see a strong barbell effect in VC fundraising. From that post:
I believe what we’re going to see in the venture industry is a bifurcation of fundraising– basically a barbell on the graph of fund sizes. Large, well known, multi-sector and multi-stage “mega-funds” will be able to raise
or greater at one end of the scale, and smaller, more focused funds will raise
or less on the other end – with a relatively small number of funds in the middle. [note: not sure what the problem is with the graphic from the original post, but I do know that it’s not rendering correctly)
Today the NVCA and Thomson Reuters released the
and they show this barbell in full effect. Mark Heesen of the NVCA put up a :
Venture capital fundraising activity is being driven at two ends of the spectrum:
Large funds – over $700 million – are being raised and deployed by well established firms who are stage agnostic (seed to growth equity), nationally and internationally driven, and have the exit track record to attract limited partners. … At the other end of the spectrum are the smaller industry or geographically focused funds that are largely looking at seed and early stage investments.
Overall we’ve seen somewhat of a rightsizing of the venture industry with a smaller number of firms raising money and fewer firms actively investing – a trend that has been long anticipated but that we’ve only really been seeing in earnest in the last few years. Of course with a large number of small, seed focused funds out there, the chances of getting “stuck” at Series A or B without a good funding option goes up (this is the so-called Series A crunch that we’ve been hearing about of late). That said, I’m a capitalist at heart (and by title) and believe that ultimately the market sorts these sorts of things out (coming your way in 2014: the Series A roll-up fund!).
California, Massachusetts, New York, Colorado. That’s the order of states with the greatest dollar value of seed and early stage investment according to a PWC MoneyTree study that my partner Jason .
invested in 41 companies based in Colorado in 2011. Compare that with 2006 when Colorado ranked 12th on the list with just under
invested in 32 companies.
That’s an incredible achievement and says a lot about the state of the entrepreneurial ecosystem in Colorado and our rising profile on the national stage. I’ve written extensively on why Boulder specifically, and Colorado in general, are great start-up markets (see , for example). And these data show that the work and effort of many people in our state is paying off. I often tell people when they ask me how to replicate the success we’ve had here in Colorado that the journey is a long one. When building an entrepreneurial community one needs to take a 10+year view of the effort. When I think back to what the Colorado market looked like when I joined the venture industry about 12 years ago (based here, but working for a CA firm), it’s almost hard to fathom the changes. And while the number of venture firms located in Colorado has diminished significantly in that time, the overall entrepreneurial environemnt has really flourished. All giving support to what I believe to be a key truth about our industry – !
So congratulations to all the great Colorado entrepreneurs who have made this state a great place to start and build a business.
I love the start-up world. I love working with founders and young companies. I love the excitement of working on business ideas that are new and different. I love seeing the success that often comes from this hard work.
I’ve never before in my professional life seen a time of such innovation and creativity. At Foundry we see more business plans now than we ever have. And what’s more, more of those business plans are really interesting (and fundable).
It goes without saying that I love the business of venture capital. I love helping entrepreneurs work on their ideas. And I love helping companies figure out how to become as successful as possible. I love the challenge of trying to figure out the next great investment and the energy that comes from working with amazing and creative people.
But I’m worried and I wanted to get it out there.
I’m worried that in all the hype, in all the “we launched our company” events, and “we changed our name again” parties, and “we redid our website – come celebrate!” shindigs, and the SXSW parties, and the hoodies, and everyone who is “killing it!”, that we’re losing sight a bit of the really hard work that is creating and building a business.
I’m worried that in offering term sheets after a single 60 minute meeting, and in pricing early stage deals like they were already late stage successes and most egregiously by constantly running around self promoting and self aggrandizing, VCs are falling prey to a cult of personality about themselves and forgetting that their jobs are to help companies be successful. And as far as I can tell, very few seem to believe what , which is that entrepreneurs come first, not VCs.
Don’t get me wrong. I enjoy a good party (not to mention a good hoodie!). And I recognize the reasons to celebrate important company milestones and in going to industry events like CES and SXSW. And in bringing a bunch of customers, prospects and partners together at a social event. But I feel like I’m hearing less of “did you see XYX company’s great new product” and more “are you going to so and so’s party at ad:tech:”. I’m not exaggerating when I tell you that I’ve received 30 invites to SXSW parties but not a single invite to a panel session at the conference. And when someone tells me that someone is “killing it” (a phrase I think I hear 10 times a day these days), more often than not they mean “doing the job they were hired for”.
I hear more and more stories about companies making a pitch to a VC and having an offer before they walk out of the room (entrepreneurs: do you really want to work with someone who puts so little thought into their investment process that they would do this?). And the way VCs talk about the companies they work with has clearly shifted to be substantially more VC centric (lots of use of “I” and taking credit for company success as something they themselves created rather than participated in or helped with). And, of course, much has been written about rising valuations and the potential risk this poses to particularly early stage companies. Not to mention the increasing popularity of the “party round” where many VCs participate but no one actually takes ownership (also not good for entrepreneurs, in my opinion).
And it feels like a lot of this is for external show. I’ I run a shit hot start- I saw [insert big name technorati here] at our company party last night. I’m in such and such company with [long list of other investors] and doesn’t that make me awesome. I’m awesome I’m awesome – look at me!! And not really about building great products or great businesses.
So by all means, lets keep having fun. But let’s also remember that the goal is to build great companies. And please – my fellow venture capitalists – can we take it down a few notches and remember that our role is a supporting one. If you wanted to be the star you should have become an entrepreneur.
I recently waked into a pitch meeting for a social networking related business and was surprised by what I saw. I had interacted with the entrepreneur over email – taking a look at the initial business plan and setting up the meeting – but we hadn’t met in person before. In front of me were three guys in suits, each in their late 40’s or early 50’s, with an older Dell laptop and a paper print-out of some product ideas. And as I sat there listening to their pitch I couldn’t help but think about how differently I might have reacted if this team was in their 20’s or 30’s, dressed in full tech/nerd hipster outfits (or at least jeans and sneakers), and whether there is a negative age bias in venture capital. Here were three guys with 20-30 years of business experience, but I was having trouble getting past my expectation of what they were going to look and act like, versus what was in front of me.
An LP of ours once asked a question that dealt with a similar subject (ironically, although we were in our Boulder office and the LP in question was in jeans, my partners and I were all in sport coats, as we always are when presenting to our investors). I can’t remember exactly how he phrased it but it was something like: “When do you guys get to be too old to do this? To relate to the younger entrepreneurs who are starting companies in the investment areas in which you guys focus.” To be quite frank, this question had never actually occurred to me before. Likely because I still think of my self as young and hip (although I am neither). And because I figured that as long as we are passionate about what we’re doing, we’ll relate to entrepreneurs who have that similar passion (some variant of that is how we answered our investor at the time).
But actually it’s true. Certainly there is some amount of age bias in venture. Early stage tech is considered somewhat of a young person’s game. And while I’ve worked with many very experienced entrepreneurs who were and are fantastic, I wonder if the initial pangs of question I felt on entering a room with 3 middle aged guys in suits pitching me their business plan is something that is deeper than a momentary hesitation.
I’d love your thoughts on this.
While there’s been plenty of discussion and debate about whether we’re in some kind of valuation/venture bubble right now for early stage tech, there is one bubble that I’m pretty sure of. I’m seeing more great business ideas right now than I can remember seeing at any time in my 10 year venture career.
We typically see around 1,500 business plans a year at Foundry (we actually see more than that, but this is the approximate number that are relevant to our investment focus). On average we’ll take a meeting with somewhere around 10-15% of these and hear a bit more than what was in the introductory email or initial business plan. And we typically invest in 8 (our
does a pretty good job of tracing our investment history and pace if you flip through our old posts). These numbers work for us and for our strategy and part of our operating philosopy is not to deviate significantly from our investment pace (depending on the mix of seed investments this number could go up or down in any given year but overall we’re comfortable at roughly the 6-10 new investments per year pace).
But something isn’t right with the early stage world right now.
what a great time it is to start a company and clearly more and more people are believing that because we’re seeing a significant uptick in the number of investment opportunities we see here at Foundry (I’m sure we’ll be well above 2,000 for the year). More importantly, we’re seeing many many really good, interesting ideas. I’m blown away by it. And it’s frustrating, because I can only spend time on so many things and we’re still only going to make 6-10 new investments in any given year. But never before have I had to say “no” to so many businesses that 1) I thought we 2) were clearly going to g and 3) in another time/market I’d love to spend more time with.
To be clear, I don’t see anything to suggest that traditional venture math won’t continue to hold true (a good performing venture fund will still see about 1/3 of their investments fail, another 1/3 do only “ok” and 1/3 do better than that – with maybe 5-10% becoming real stars). And, of course, I recognize that part of our job on this side of the table (at least in venture funds with our investment strategy and not one of making 20 or 30 investments a year to spread around) is to make the hard choice of which of a number of great companies really has the chance to be outstanding.
But wow – is it a fun time to be in venture! And perhaps even more so, a fun time to be an entrepreneur…
You already know the about the state of the venture capital industry in 2009: venture investing down (32%), exits down (14%; slowest exit year for VC backed companies since 1995), fundraising down (56%), IPO’s almost non-existent (8 venture backed IPOs in 2009). It’s a bleak picture for the industry overall, even if there’s a group of us that
this is a great market in which to be investing (and it clearly is). These stats got me thinking about the future of the venture industry and I thought I’d offer up some thoughts on where we might be headed.
First, let me frame the conversation by stating that I agree with
that somewhere around
is the right “steady state” investment pace for the venture industry as an asset class. At this investment level the return profile of the industry maps to a reasonable expectation of inputs and outputs (the money invested in start-ups as compared to the exit activity). By that measure, we actually still have a ways to go to reach that equilibrium in the venture markets.
According to VentureSource,
was invested by the venture capital asset class in 2009, and this amount was the lowest investment total in the 10 years of data that I had access to. The system is still a little bit out of equilibrium, however, as this is a far greater total than the amount of capital raised by venture firms in 2009 (). In fact looking back at the past five years
more has been invested by firms than has been raised. While presumably this will lead (eventually) to fewer dollars invested, the VC fundraising average for the past 5 years has been almost , suggesting that we still have a ways to go to get to Fred’s
bogy. 
What’s even more interesting to me is to consider the nature of this fundraising and the ramifications it has on the industry as a whole. I believe what we’re going to see in the venture industry is a bifurcation of fundraising– basically a barbell on the graph of fund sizes. Large, well known, multi-sector and multi-stage “mega-funds” will be able to raise
or greater at one end of the scale, and smaller, more focused funds will raise
or less on the other end – with a relatively small number of funds in the middle.
Looking at the 2009 fundraising data shows that this trend is already taking shape, three well known funds in the former category closed on over
in commitments
– NEA ($1.24Bn), Norwest ($1.2Bn) and Khosla Ventures (). At the bottom end of the scale there were numerous funds that raised money in the
range).  And while there were certainly a few funds raised in the middle (notably Greylock, Matrix, DCM, CRV and Andressen Horowitz) my hypothesis is that fundraising in this size range will diminish over time as LPs move their money either to a smaller number of diversified, extremely large funds or the larger number of smaller, more focused funds (Foundry is clearly in the latter category).
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This is a cross post from the . We recently put together an analysis of companies that have presented at VCIR over the last 10 years. And the numbers are pretty impressive – reinforcing why the conference is such a great opportunity to see great companies from around the rocky mountain region. For more information on the conference itself, including how to register, visit .
VCIR By the Numbers:
Presenting companies: 212
Companies who raised additional funding after their VCIR appearance: 127
Total funding raised by these companies (only includes amounts raised after their VCIR presentations): $2.5 Billion
Presenting companies acquired: 29
Total acquisition value (includes announced values for 19 of the 29 transactions): $4.4 Billion
The clear take-away, of course, is that VCIR is an event that showcases outstanding companies from around the Rocky Mountain region. Hope to see you there.
In the latest lob into the morass that has become somewhat of a sport amongst journalists and those that follow the venture capital industry, Carl Schramm and Harold Bradley write in
about “”. The evidence? Venture capital funding is down – from an “astonishing” 1.1% of US GDP in 2000; and in the 3rd quarter of 2009 down 33% from the same period a year earlier. To add to Schramm and Bradley’s collective horror, “two areas crucial to American progress cry out for capital-intensive investment: clean energy technology and biotech. And the VC industry isn’t delivering it. (Info tech, which by now requires few capital investments, still accounts for the lion’s share of those shrinking VC investments)” 
While I strongly believe that the venture capital model is (and should be) changing, this kind of journalism, drawn on incorrect interpretations of the data serve only to sensationalize and add little to the real debate on venture capital. It poorly sets up the 2nd half of their article that talks about the VC funding model (more on that in a post later this week). Here’s my view:
Is there a problem with the current market for VC funding?
Comparing anything about Venture Capital to the markets of 1999 and 2000 is a fools errand. Without question, the venture markets (and the markets in general) were completely overblown in that time period. There were too many venture firms and too many companies getting funded. While this might have been good for some VCs that managed to cash in on the bubble (I, alas, was not one of them – my venture career started in the very dark days of late 2001) it was clearly bad for the industry as a whole (none of the participants benefit when an industry goes through a bubble and burst cycle such as the one that venture capital and technology did during that time period – and we’ve been struggling to “normalize” the industry ever since). I’d argue forcefully that we’re still searching for the optimum level of venture capital funding. Schramm and Bradley seem to be relying on a “less = bad” analysis of the funding markets and are completely ignoring the question of equilibrium (whether we’ve reached one, what the right level of funding should be, etc). Markets function optimally when there is balance and while this balance in private markets such as venture can be illusive, we’re much closer to that balance now than we have been at any other time that I’ve been a venture capitalist (and certainly much more so than in 2000).
Are VCs falling short in their funding of CleanTech and Life Science and favoring IT?
Schramm and Bradley site the PriceWaterhouseCoopers study on 3rd Quarter 2009 investing to back up their assertions. Yet the study contains data that completely contradict a number of their key points. In fact event the title of the
that announced the 3rd Quarter funding results contradicts the conclusions that Schramm and Bradley draw from it: “Venture capital investment increase in Q3 2009 driven by clean technology sector, according to the MoneyTree Report” (I’ve added the italics). The very first paragraph of the release states in part: “The increase in dollars invested was driven by several large rounds in the Clean Technology sector, one of which is the ninth largest deal since 1995.  The Life Sciences sector (biotechnology and medical device industries combined) also had a solid quarter relative to other industry sectors, leaving Software as the third highest investment sector, a notable decline in industry ranking.“ I won’t quote it here to limit the length of this post, but if you click over to the press release take a look at the 3rd paragraph which is entirely focused on the shift of capital from IT to CleanTech and Life Sciences.  Also missing from the Schramm and Bradley article was that the 3rd Quarter funding totals were actually up from the 2nd Quarter (their article implies that venture funding is falling off a cliff – clearly not the case).
Is there still a market for IT investing?
As an IT investor, of course my answer is going to be a resounding “yes&!” But don’t take my word for it – just look around you at the amazing pace of continued innovation in technology and the Internet. From new ways to communicate (Twitter, Facebook), to new ways to advertise your business (Google, AdMob, etc, etc) to new ways to play games with your friends (Zynga), there’s still plenty of innovation going on in information technology.
What’s sad is that there’s a real debate to be had on the future of venture capital and the changing VC model (see my partner Jason’s take on that subject ). If we drop the pretence that “VC is Dead” perhaps we’ll finally get to the interesting part of the conversation…
Shout-out to Sequoia for featuring Omar Hamoui on their home page today (he’s the CEO of AdMob which was acquired by Google today for ). Well done!
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