Posts from VC & Technology

One hundred forty seven people have donated to the Donors Choose campaign we are running this month here at AVC. That's incredible to see. With five days left, we are on pace to raise $20,000 from about 175 people. Here is how we've done in prior years.

So this is likely to be our biggest year ever and that's before the HP Match which will double the amount we raise for classrooms where young woman learn science and math.

As many of you know, we are going to have a meetup to celebrate this campaign. It will be on December 8th at 6pm at Washington Irving High School right off Union Square in NYC. The meetup is open to anyone who gives to the AVC Donors Choose campaign.

Here's the Meetup.com page for the event on December 8th. Please go RSVP if you plan to attend. We will have the list of all the donors at the event so you need to be on that list in addition to RSVP'ing.

I hope to see you there.

It's Thanksgiving. And I woke up thinking about entrepreneurs. It was probably this awesome Steve Blank blog post that caused that. Steve says:

I believe that we will look back at this decade as the beginning of an economic revolution as important as the scientific revolution in the 16th century and the industrial revolution in the 18th century. We’re standing at the beginning of the entrepreneurialrevolution. This doesn’t mean just more technology stuff, though we’ll get that. This is a revolution that will permanently reshape business as we know it and more importantly, change the quality of life across the entire planet for all who come after us.

I have had the pleasure of working with entrepreneurs for the past 25 years and as I get older I appreciate them more and more every day. Not only do we work with great tech entrepreneurs in our USV business, but the Gotham Gal and I invest personally in entrepreneurs who are working in other sectors. We've backed real estate entrepreneurs, restaurant entrepreneurs, non profit entrepreneurs, media entrepreneurs, food entrepreneurs, local businesses, and many others. We get such great pleasure from watching people imagine something and then create it before our very eyes. 

I hope Steve is right and we are on the cusp of the entrepreneurial revolution. Our economy needs something new and entrepreneurship can provide that. So I am dedicating this thanksgiving to all the entrepreneurs in our lives and everywhere else in the world. Thank you.

I've been pretty clear as of late that I think the market for investing in web startups is getting overheated. When I talk to some people about this, they say "you should shut down and ride out the bubble on the beach." To which I say "we don't think we can time markets."

If you had a crystal ball, then doubling down when the market is ice cold and folding your hand when the market is white hot would be a great investment strategy. But nobody has a crystal ball and timing markets is a lot harder than it seems.

So I prefer to focus on pacing ourselves. What I like to say is "we should add the same number of names each year to our portfolio and put out about the same amount of cash each year." The number we try to add each year is 6-8 new portfolio companies. USV has been investing since November 2004 so we've been in business exactly six years. And we will have 37 portfolio companies soon. So that is almost exactly 6 new investments per year. We had 31 portfolio companies at year end 2009, so we've added 6 new names this year.

I don't have the cash outlay numbers handy this sunday morning but I do know that it took us four years to put the 2004 fund to work. And or current forecasts are that it will take us four years to put the 2008 fund to work. So that's a good proxy for cash outlay per year.

This strategy works particularly well in the venture capital business because we generally will make three to four investments in each company, spread out over a five to six year period. So no one investment at a "bubble valuation" will impact our average valuations across our portfolio. Said another way, we will invest in 20 to 25 companies per fund and we will have three to four investments in each company, so we will make 60 to 100 individual investments in any fund. If we spread those 60 to 100 investments over a six to eight year period, we can average out the valuation spikes and valleys.

I observed this strategy at work in the first VC firm I worked for. The partners had been investing for fifteen years when I showed up and they had evolved into this strategy and taught it to me. When I left that firm and started Flatiron Partners in 1996, Jerry and I started out with a reasonable and steady pace. It took us about three years to put our first $150mm fund to work. But when we got our second fund of $350mm in 1999, we adopted a different approach. The first mistake was to raise a much bigger fund just as the market was getting overheated. The second mistake was to put that fund to work in 18 months. We went from putting out $50mm per year to putting out $250mm per year, just as the bubble was reaching its peak. The results speak for themselves. We made greater than 5x on that first fund. Eleven years later, we will be lucky to make 2x on the $350mm second fund.

So when I look at where we are right now, it reminds me so much of 1999 and frankly it scares me. But we are not pulling back. We are sticking with our investment strategy and putting out cash and adding new names to our portfolio. But we are doing it with a very close eye on pace, both in terms of names and cash outlays. I think that is the right approach and that it will serve us well as we navigate the tricky waters we find ourselves in.

The Gotham Gal is involved in an event in late January called The Women Entrepreneur Festival. They are doing it with and at NYU's ITP program.

I love the idea of calling it a "festival." This is a celebration of women entrepreneurs. Exactly what we should be doing to showcase role models and make the point that women are just as good at starting companies as men are.

They also came up with an innovative format. They have four groups of entrepreneurs; social, media, design, and green. Each group has a bunch of women entrepreneurs and at least one male entrepreneur. In the morning each group will do "show and tell" so you can see what each of them has built. In the afternoon, the groups will go on stage again to talk about their sectors and the role that women play in them.

It's great to see ITP getting involved in something like this. ITP is one of the secrets of the NYC tech startup scene. It is a program that focuses on the intersection of design, media, technology, and communications. It is all about the things that makes NYC's startup sector special. And it was started by a women entrepreneur, Red Burns. So it makes so much sense that they are hosting a festival for women entrepreneurs.

The festival is limited to 150 participants due to space limitations. You can apply to attend here. Acceptances will be made on a rolling basis. If you are accepted, it costs $50 to attend if you are a student and $200 to attend if you are not a student.

I got some great news about the Donors Choose Campaign we are running this month here at AVC.

HP will match every dollar we donate in this campaign. They did that last year as well so this is two years in a row that we've been able to leverage HP's generosity for the benefit of teachers and students.

It's a good opportunity to remind everyone that we are focusing this year's Donors Choose campaign on math and science education for young women.

And finally, I'd like to remind everyone that all contributors to this Donors Choose campaign will be invited to a Meetup I am hosting in NYC on the evening of December 8th. Here's the giving page if you want to make a donation and come to the meetup.

I hope we can get a representative from HP to attend the Meetup.

This was a lot of fun. I got to share the stage with John Doerr, someone I've admired and respected for many years, and John Heilemann, who never ceases to entertain and educate me.

Here's the video. It's pretty long. Just shy of forty minutes.

Bill Gurley penned a fantastic post about IPOs yesterday. Go read it.

Bill presents a very compelling case that IPOs still have a role to play in the startup ecosystem and he also puts forth some strong data suggesting that the IPO market is coming back and good companies are taking advantage of it.

But my favorite part is his counterargument to the point that Wall Street forces entrepreneurs and managers to run their companies with a short term focus (an issue I've long been concerned about). Bill writes:

One recent argument knocking the IPO is as follows: Wall Street is too short-term focused, and that if you want to run your company for the long-term you should remain private. There are three great reasons that this “can’t focus on the long term” argument falls short — Jeff Bezos, Marc Benioff, and Reed Hastings. All three of these amazing entrepreneurs turned CEOs took their company public on a standard IPO time frame. They also all three conveyed to Wall Street that they would postpone short-term earnings results in order to chase a greater long-term objectives and ambitions. The intelligent mutual fund investors that were swayed by their convincing arguments (there were many) were handsomely rewarded. Furthermore, Bezos, Benioff, and Hastings all three used “being public” as a bully-pulpit to tell their version of their industry’s story, thereby aiding their advantage. If you are unconvinced go ask Steve Riggio, Tom Siebel, or Blockbuter CEO Jim Keyes.

Back in the late 90s, my prior firm had somewhere between a dozen and two dozen IPOs out of a portfolio of 50 some names. Many of those IPOs ended badly as the companies failed and were sold for way less than the offering price. That experience taught me a great deal and as Bill notes in his post, I've been bearish on IPOs since then.

However, even in my most bearish posts on the topic, I've always said that the best 10% of venture backed companies ought to at least consider an IPO. If you are operating a business with the potential of a Netflix, an Amazon, or a Salesforce, then you are in a different league and the IPO should be in your playbook. Whether you actually call that play is another story, but it needs to be there.

We have close to forty portfolio companies now and I can easily count four of them that someday will make great public companies. In my view, you need to be able to say yes to all of the following questions to have a great public company:

1) Market Leader

2) Sustainably Profitable

3) Strong Top Line Growth For As Far As You Can See

4) Strong Management Team With Public Company Experience In The Key Places

5) A Willingness To Build The Company Without Regard To Short Term Stock Price Movements

6) The Ability To Credibly Trade At A Billion Dollars of Market Cap Or More

If you have a company that fits that bill, then you should absolutely be thinking about an IPO. But if you don't, then you should think about some other approaches to exit, most likely M&A to a strategic or financial buyer. You may also want to consider secondary sales to provide liquidity while the company continues to build toward an IPO or a sale.

Bill's post is well timed. The startup sector is on an upswing and there are quite a few really strong businesses out there sitting in venture capital portfolios. If those companies and the VCs behind them are careful and thoughtful about going public, and if only the best companies choose that route, we could see a healthy and vibrant IPO market for startups reappear in the coming years.

We have enjoyed an amazing run in the web startup and investing space over the past five or six years. In this sector of startupland, company creation is up, investment is up, there are plenty of success stories, and not all of them are based on quick flips and takeouts. There is real revenue flowing through web companies and many web startups formed in the last five or six years are operating profitably. It has been good to be a web entrepreneur and a web VC, and I think it will continue to be for quite some time.

However, there are a few storm coulds out there that we need to be watching. In particular, I think the competition for "hot" deals is making people crazy and I am seeing many more unnatural acts from investors happening. If it were just valuations rising quickly, I'd be a bit less concerned. But we are also seeing large deals ($5mm to $15mm) getting done in a few days with little or no due diligence. Investors are showing up at the first meeting with term sheets. I have never seen phases like this end nicely.

We are also seeing a massive talent war for software engineers going on in Silicon Valley and it is spilling over into other regions. The story by Mike Arrington this morning about a Google engineer is just one example. There are many more examples of poaching by companies driving up salaries, equity packages, and stay and join bonuses.

You might say, "this is good for entrepreneurs and software engineers, they are finally being valued what they are worth." Maybe. But I think both of these situations are unsustainable. And anything that is unsustainable will eventually stop happening. And when it stops happening, there will be a dislocation event that will cause people to change their behavior.

Of course if you are a VC or a HR person in a web company, you don't know when that event will happen and you have to operate your business until then. So we will see this behavior and other troubling things continue to happen for some time to come. When will it stop? Who knows? But be prepared for it to end. And when it does, things will be different. And we should all be prepared for that time.

Our November campaign to raise money for classrooms focused on science and math education for young women is one third of the way done. To date we've raised almost $3000 from 30 donors.

In prior years we've raised about $30,000 from about 100 donors so we are pretty far behind prior years. I just gave another $250 spread around a few projects. I am also going to email (via donors choose) all the donors from prior years. So if you get an email from me asking for your support, don't be surprised.

This is the one thing I do each year where I ask community members to dig into their pockets. If you are so inclined, I'd very much appreciate it and so will those young women. Here's the giving page.