Tag Archives: Venture Capital

Screendoor opens to accelerate diversity within VC and tech

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Most venture firms define success through their growth and generational longevity. We don’t. When Hunter and I started Homebrew it was with the idea that we’d always stay small and focused. That meant we’d never grow the partnership beyond the two of us and that when we were done investing, there wouldn’t be a next set of Homebrew partners to continue the firm’s work. We made this decision to be the best version of ourselves and to commit all our time to our founders, but it didn’t come without tradeoffs. Namely, we haven’t been able to contribute to the important efforts undertaken by many others to increase representation amongst the ranks of Partners at venture capital firms. While everyone on our team besides the two partners is female (and all have carry in our funds), we’ve been limited in the direct impact we can have on diversity in the VC industry. That changes with the launch of Screendoor. 

Screendoor is an investment vehicle that will provide $50+ million of institutional capital and experienced counsel to underrepresented venture capital investors who are raising their first funds. Over the past few years, many emerging underrepresented GPs have approached us for fundraising advice and LP introductions. And the message from them has been clear — they’re over-mentored and undercapitalized. Hunter and I, along with a group of peer GPs (who are almost all underrepresented themselves) want to put those new, underrepresented GPs in business. We believe there is no better (or faster) way to change the composition of the venture capital and technology industries than enabling more underrepresented investors to allocate capital in the tech ecosystem. We’re all investors in the fund and aren’t taking any fees or carried interest. Instead, we’re devoting our time and money to the goal of generating outsized returns by backing the future leaders of the VC industry.

Historically, participants in the technology and VC industries have benefited from an incredible virtuous cycle of wealth creation. VCs provide capital to founders, founders hire teams and all of those people generate wealth when companies are successful. That success leads to more capital and advice funneling back into the ecosystem. But unfortunately, huge segments of the population have been absent from the flywheel, leading to massive, missed economic opportunities for them and the broader ecosystem. 

Screendoor’s theory of change is centered on recreating this virtuous cycle for underrepresented groups. It’s empirically true that underrepresented investors are more likely to fund underrepresented founders, who in turn are more likely to hire underrepresented team members. By providing capital to underrepresented investors, we hope to kickstart the virtuous cycle of generational wealth creation for underrepresented groups, leading to more dollars, advice and talent flowing back into the ecosystem.

There has been some progress made with representation in the venture capital industry over the past few years. But it’s clear that change has been slow and not as significant as the industry needs. Change will continue to be slow if the industry waits for large venture firms to add underrepresented investors to their ranks and put them on the traditional path to becoming check writers who make 1-2 investments per year. Adding more underrepresented investors to the industry is the right goal. But there are faster and more scalable ways of bringing greater representation to the VC and tech industries. Our hope is that Screendoor will be one of many models that help accelerate progress towards a more representative industry. 

Growing up in the heat of Las Vegas, screendoors were a feature of many homes. They were essential for letting the breeze in while still protecting the home. But most importantly, they were an invitation to come in and get respite from the heat. In our neighborhood, if you could peer into a house through the screendoor, it was a sign that you were welcome to come grab a cold drink, use the bathroom or just get a few minutes of cooler air. The “thwack” of a screendoor would announce you were coming in, and the reception was always one of warmth, safety and sustenance. With Screendoor, we hope to provide that same welcome and feeling to the next-generation of investors who will redefine the tech and VC industries. 

Homebrew won’t live on beyond me and Hunter, but Screendoor can! It’s our shared intent, along with Screendoor’s other Venture Advisors and a group of experienced institutional LPs, to grow and become an important “Limited Partner” in the VC industry. We recognize that when we started Homebrew we fit the “profile” — two men with a long history in Silicon Valley at well-known tech companies and with some investing track record. We’ve benefited greatly from being included in the virtuous cycle of tech and VC. With Screendoor, we hope that we’ll make it possible for those who historically have been excluded to finally reap the same benefits. 

If you’re an emerging manager interested in learning more, please contact us. If you’re an LP interested in a potential commitment to the investment vehicle, you can reach us here. And finally, we’re hiring for a Head of Operations. If you’re excited about Screendoor’s mission, consider applying here.

How to Diligence Your Investors (Crowdfunded or Not)

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The investment world is buzzing about AngelList (Disclosure: I’m an individual investor in the company) and the impact that it will have on angels and VCs, However, part of the conversation that has been missing is the impact on startups. The obvious benefit is that there will be more options for startups to raise capital quickly and easily. But the potential downside is that choosing the right set of investors for a company may become much harder for entrepreneurs. While an abundance of capital options is wonderful, choosing investors should be based upon more than just valuation and dollars invested. After all, an investor is a long term partner for your business and the process of choosing the right partner should reflect the ongoing nature of this relationship. Startups spend hours upon hours vetting potential employees, abiding by the mantra of hiring slowly and firing quickly. Why wouldn’t even more diligence be conducted on potential investors — people who can’t be fired and actually often have the power to fire you! Here’s how to diligence potential investors:

References

Ask to talk to current and past portfolio company founders and CEOs. Be sure to talk to a couple from companies that failed. And definitely leverage your network to reach out to a couple references that the investor did not provide herself. Would the entrepreneurs take the investor’s money again? When there was bad news, how did the entrepreneur feel when telling the investor and how did the investor react? Ask for at least one instance when the investor helped with a critical company challenge and what specifically she did to help. If possible, consider talking to angels or VCs that the investor has worked with previously.

The Airport Test

You’re traveling with your investor and your flight is unexpectedly canceled. You’re stuck at the airport for the next few hours. Would you look forward to the time together or would you instantly fill with dread? A similar test is the Beer Test. At the end of a long day, would you enjoy grabbing a beer with the investor? Spend significant amounts of time with the investor, both inside and outside of the office, to answer these questions. The goal of these tests is to figure out whether you like and trust the investor. A good investor is going to be your toughest critic, your biggest cheerleader, your best salesperson and your most compassionate psychiatrist. You’d better be irrationally comfortable with that person and his passion, integrity and values before taking his money.

Expectation alignment

When choosing an investor you’re choosing a partner to help you build your business. Just as you would make sure you have alignment of expectations with a cofounder, you need to do the same with investors. What does the investor see as the key milestones before the next financing? What kind of financial outcome is the investor expecting? How frequently and in what ways does the investor expect to interact with you? Asking questions and sharing your perspectives ensures that there are no surprises for either side down the road and also helps set the stage for an honest, direct, collaborative relationship.

Personal stories

At Homebrew, we love hearing how entrepreneurs have gotten to where they are and the “Why” behind the founding of their companies. Similarly, we advise entrepreneurs that they should know the personal stories of their investors. You’re going to be working with your investors very closely and you’ll get to know each other both personally and professionally. Find out if you have common ground upon which to build a long relationship. Why is he an investor? How did he end up being one? What does he like most and least about being an investor? How does he think he can add value to your company?

Getting to know your investor well before the investment is critical because a financing is not a single, moment-in-time transaction but a long-term commitment to each other. The relationship after funding should feel like a continuation of the relationship pre-funding and not like something different now that the courtship period is over. As an entrepreneur, you’re adding to your team every time you choose an investor. Keep in mind that there is much more to consider than what can be captured in a term sheet.

Homebrew is open for business

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I’m thrilled to launch Homebrew today.  And even more excited to be doing it with my dear friend and now work-wife Hunter Walk.  Homebrew is truly the outgrowth of our experiences, observations and passions.  Maybe surprisingly, after Twitter, it wasn’t easy to decide to return to investing when there is so much startup activity and there are so many fast-growing companies.  But with Homebrew we saw the chance to construct something of our own design that blends the best of investing and operating in support of creating companies of lasting value.  The combination of an opportunity to serve entrepreneurs differently (and hopefully better) by working with them very closely on product, organizational and strategic issues and the ability to do it with a great partner made the decision for me.

Homebrew is our startup and our goal is to establish product-market fit with entrepreneurs as our customers; helping them build the companies that they envision. We’re creating a long-lasting platform for people who care about the Bottom Up Economy.  And we hope you’ll do us the favor of sharing in what we brew.

Homebrew is open for business.

Venture capital’s new normal

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In many ways, 2010 was an incredibly surprising year for the VC industry. The pace of investment activity picked up considerably following the economic turmoil in 2008 and 2009. The number of companies started, investment valuations and the speed at which financings were completed all increased dramatically relative to the prior two years. At the same time, the long awaited restructuring of the VC industry started to become reality with fewer traditional funds being raised, more small (angel and micro-VC) funds launching and many VCs leaving the industry for other careers. Finally, the M&A market picked up and the IPO market cracked open a bit, creating more liquidity than the past couple of years.

2011’s even faster start has surprised not only many outside of the VC industry, but also many VC professionals. There has been extensive commentary on what is perceived to be an overheated or irrationally exuberant market, but I believe that we are simply experiencing the “new normal”, at least for the next few years. The reality is that there remains too much investment capital in pursuit of funding the handful of companies started each year that will generate outsized returns for limited partners. VC industry returns have been abysmal for the past decade, so missing out on those winners could mean the inability to raise new funds for many firms. At the same time, the cost of starting companies is lower than ever and angels and funds of all sizes are competing to finance the same, increasingly capital efficient businesses. More sources of abundant capital mean more companies being started and increasingly low odds of predicting which companies will emerge as winners. All of this creates a dynamic in which the first inkling of success for a young company yields multi-million dollar financing offers at seemingly inexplicable valuations ($100 million has become the new $10 million) and proven success generates multi-hundred million dollars financings at unprecedented valuations.

Unfortunately, this is likely to be the difficult reality of the VC industry for at least the next few years. For now, this new normal seems to be limited to the private investing market, not the public market, suggesting that this is not a bubble like the one experienced a decade ago. Further, in the VC market, dollars invested today don’t prove themselves to be ill spent for several years down the road. The repercussions of poor investing take even longer to unfold. The new normal in the private market will not quickly disappear with the bursting of a bubble, but rather slowly give way like an aging balloon bleeding air.

While many VCs will lose playing this new game, the good news is that there has never been a better time to be an entrepreneur, or in all likelihood, a consumer. Capital is freely and cheaply available to those willing to accept the startup challenge, both here in the US and around the globe. The startups that do emerge from the current financing frenzy as market leaders will have created innovative products and services for which consumers will be the ultimate beneficiaries. Those entrepreneurs will have created enormous wealth for themselves. The VCs that supported those entrepreneurs may or may not have generated returns for their investors. Which would you bet on?

Angelgate: Much ado about nothing

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It seems that the hullabaloo over Angelgate is finally dying down but I’ve been in Austin the last couple of days and I was surprised to hear how curious people here are about all that has gone on in the echo chamber of the Valley. I’ve been sharing my not particularly unique perspectives (Mark Suster wrote a super post on the topic) with folks here and elsewhere so I thought I would publish them for a broader audience as well.

1)      If you think that some of the smartest angels in the industry were simple-minded enough to get together and attempt to collude in any real way, you just don’t understand how the angel and venture capital investing industries work. The reality is that it would be impossible to collude in a market where the supply of capital is so fragmented, especially for the best investment opportunities. Further, all it would take is one investor to break from the too large group of potential colluders to make it all fall apart. There is nothing unusual about investors getting together to talk about investment trends and overall market dynamics. That happens regularly, just as entrepreneurs regularly trade notes on the fundraising environment, firms, partners, etc. Move along, because there is nothing to see here.

2)      I agree with Ron Conway and Matt Cohler. There are professionals who invest mainly other people’s money, called venture capitalists, and there are professionals who invest their own money, called angels. These two groups have always existed, but historically there have been more similarities than differences. What has happened is that many of the “old school” VCs have gotten bigger and moved to writing larger checks in mainly growth and later stage companies or to investing only in businesses that have the potential to change industries and produce outsized returns. At the same time, the cost of starting companies has fallen and the exit environment for startups has increasingly shifted to outcomes of less than $100 million. All of this created a larger funding gap in the market than existed previously, opening the door for an entirely new generation of angels and venture capitalists (now called micro-VCs for some inexplicable reason). Markets have a natural tendency to fill gaps and that is exactly what has happened in the venture capital industry.

3)      The not newsworthy truth of the venture market is that there is far more cooperation and camaraderie than some would have us believe. As an example, we at Battery have made over 20 seed investments in the past 2.5 years and in nearly every case those investments were made in partnership with angels, “micro-VCs” and/or “old school” VCs. As long as expectations are aligned at each step in a company’s development, there is no reason that this type of cooperation won’t continue even as the market adjusts to its realities.

4)      Raising money is not for everyone. I always tell entrepreneurs that one of your primary goals in any financing should be to maintain optionality. If you want to build a business that will generate great cash flow but not necessarily grow at an incredible rate (a so called lifestyle business….a pretty good one if you ask me) or that you can bootstrap to profitability, I would highly encourage you to do so. But if you’re going to raise money, know that there are consequences to doing so. All investors, angels and VCs alike, want to help entrepreneurs but they also want to make money. So know what the expectations of your investors are when you agree to take their money. Josh Kopelman likes to say that when considering financing, entrepreneurs have the choice of taking the local train (smaller amounts of money typically associated with angels) or the express train (larger amounts of money typically associated with VCs). If you choose the local train, you can likely get off (sell the company) at any stop along the way. But if you choose the express train, you’re on board for the entire ride. And that long, tumultuous ride isn’t for everyone. Be honest about your ambitions, both to yourself and to your investors. You’ll find that the differences between angels and VCs are truly merely about expectations and not whatever nonsense that many with selfish motives and grudges like to spew.

4 sources of long term differentiation and competitive advantage

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Despite the slowdown in venture investing during most of last year, it seems like venture activity picked up significantly in Q4. The data is consistent with my own experience during the quarter, where I saw a huge increase in companies seeking financing, the return of multiple competitors for every investment opportunity and incredibly compressed fundraising processes. I fear that we’re returning to an investing and startup environment much like the one prior to October 2008. One impact of this behavior is that we’ll likely see, as before, the funding of many companies in the same market or with similar offerings (many people point to location-based social networking companies such as Foursquare, Gowalla, Booyah, etc. as a good example). That’s led me to try to outline what I think are the only ways for web technology companies to truly have long term differentiation. Clearly, with time and money, talented people render most software and user experiences alone indefensible. So how do Internet and digital media companies create sustainable competitive advantage? 

Network effects: Businesses with network effects have products or services that increase in value as more customers use them. When a network effects business achieves scale, it can have incredibly lasting differentiation because recreating that network poses significant challenges to competitors. Microsoft Office, eBay and Yelp are good examples of these types of products and services. Some network effects businesses can have both positive and negative network effects. For example, as many social media businesses grow in use, the volume of content to filter and absorb can become overwhelming.

Switching costs: Products or services that make it difficult or expensive to use an alternative product or service have switching costs. Creating this kind of lock-in is a true barrier for competition. DoubleClick’s DFA product is a great example of a product that had tremendous value because it was embedded in the agency online media buying process and was used by many people within agencies.

Scale: For a product or service, differentiation can be derived from scale in customer usage, capital expenditure or data. As an example, Google enjoys incredible differentiation and competitive advantage from all three sources. Hundreds of millions of people conduct billions of searches on Google each day, leading websites that want to integrate search to turn to the de facto standard in the industry. Google has spent untold sums of money on hundreds of thousands of machines in datacenters around the world to deliver the fastest, freshest and most relevant search results to its users. The hundreds of millions of clicks generated each day on search results provide Google with a vast quantity of data and insights that help improve search quality. Any new search competitor not only has to deliver a superior consumer search experience, but it also has to spend enormous amounts of money recreating the underlying infrastructure and data that makes Google such a powerful competitive force.

Culture/People: Given that web technology itself is largely indefensible, the greatest source of differentiation and competitive advantage is often execution, and that is predicated on people and the culture in which they operate. Whether it’s the culture of innovation at Google, the culture of customer happiness at Zappos or the culture of freedom and responsibility at Netflix, I’m certain that the management teams from those companies would point to the employees and the DNA of the organizations as the primary reasons for their success. I find that when the culture of a company is well-defined, it is usually a direct reflection of the founder(s) and their conscious decision to establish a well-defined company culture from the start. I only know of a few instances where the culture of an organization was either instilled in the organization at a later point in the company’s development or successfully recast by new leadership.

When choosing what investments to make, I try to keep these sources of differentiation top of mind. It’s easy to get caught up in the appeal of a sexy new consumer application or a seemingly novel approach to a business problem. But lasting, significant equity value is often only created when one or more of these differentiating factors are at play. Are there other sources of differentiation that you would add to the list?

11 tips for the VC pitch

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A couple of weeks ago, I gave the presentation below to the companies participating in First Growth Venture Network. The focus of the day was how to pitch investors and while every investor has his or her preferences, I find that there is 80%-90% overlap in what most investors are hoping to see and hear. Given that there are so many great resources on this topic available on the web for entrepreneurs, I wanted to focus on a few key things that seem to get overlooked in advance of and during many pitches. This presentation is a bit incomplete without the accompanying commentary but hopefully you can get the key points and be somewhat entertained in the process (lots of cartoons!).


 
Here are a few, brief clarifying points:

Pursue feedback: Get feedback on the pitch from people that you trust and make sure you practice it in front of an actual audience. Use this opportunity to test all of your assumptions.

Don’t talk to strangers: Research the partner that you are meeting with, but more importantly, understand why that partner might be interested in what you are doing. Investors see hundreds of businesses each year and they say no to 99.5% of them. Investors are prolific “daters” but they need to feel chemistry to get “married”. I refer to this feeling as emotional resonance and I see very few investments made where that is missing.

Small bites, big appetite: All investors ask themselves whether the business they are seeing is a feature, a product or a company. As an entrepreneur, you need to be able to sell a vision while focusing on near term milestones. Start small and focused but have a plan to get big.

Any and all questions and feedback are more than welcome!

Miners vs. picks and shovels: a contrarian venture capital investing approach?

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Earlier this week, The New York Times published an article about the “fuzzy math” driving the funding of companies in Silicon Valley. In talking to my peers in the investment community, there seems to be consensus that valuations are regularly disconnected from the reality of many companies. That said, the exuberance seems to be continuing and is at its peak amongst consumer-facing media companies.

 

At Battery, our digital media investing is focused on two categories of companies, of which the first is consumer-facing media properties that build, aggregate and monetize audiences in differentiated ways. The second category is companies that provide the tools and technologies to support the first category, including everything from ad networks to targeting and optimization software to video delivery infrastructure. Increasingly, we find ourselves spending more time on the second category while largely avoiding the first. Broadly speaking, this seems to be a fairly contrarian investing approach.

 

There is no shortage of speculative, high-priced investments being made in hopes of finding the next YouTube or MySpace or Photobucket. My perspective is that the risk/reward tradeoff associated with investing in many of these companies does not compute. I’d much rather invest in the companies that are arming all of the competitors in the consumer media market (the picks and shovels approach) than bet on identifying the one that is going to be the next big hit (trying to find the goldmine). There is no doubt that incredible amounts of equity value can be created by leading consumer media companies, as evidenced by the aforementioned companies. However, neither I nor any investors I have spoken to have found a crystal ball that tells us which consumer web properties are going to be the next ones to resonate with consumers and spread virally. In addition, there is intense competition for consumer attention on the web, making it an expensive battle to fight. Lastly, it seems that the equity value that has been created by consumer web properties in recent memory has been independent of demonstrated economic success.

 

As we learned in earlier this decade, valuing companies primarily on audience-based metrics is not a sustainable approach. At the same time, we have also seen that companies that build fundamentally sound businesses by providing value to and extracting value from paying customers can also create tremendous amounts of equity value. As an investor and an entrepreneur, do you have a better shot at creating the single winner in the online video destination market (i.e., Youtube) or building one of several successful companies in the online ad serving market (i.e., DoubleClick, Aquantive, 24/7 Real Media, Right Media)? Which businesses are easier to predict and monetize?

 

I think that chasing the next Youtube also puts investors at odds with their entrepreneurs. Searching for a single big win forces investors to take an aggressive approach to managing their portfolio of “bets”. Approaches to financing and exits can diverge dramatically when an investor is swinging for the fences at the potential expense of the entrepreneur. While the economic rewards of investing in picks and shovels may not be as great (although this can be argued), the satisfaction of building a sustainable business in partnership with entrepreneurs is well worth the cost associated with watching this current “gold rush” from the sidelines.