« swipe left for tags/categories
swipe right to go back »
I was in the bathroom this morning catching up on all the blogs (via Feedly) that I hadn’t read this week since my head was in a bunch of other things. I came across one from Nic Brisbourne (Forward Partners) titled I’m a stock picker. I wish he had called it “This Unicorn Thing Is Bullshit For Early Stage Investing” but I think he’s a little more restrained than I am.
My original title for this post was “How Can This Be A Billion Dollar Company and other bullshit VCs ask early stage companies.” It was asked by VCs to several companies I’m involved in last week. While I get why a late stage investor would ask the question when the valuation is in the $250 million range, I really don’t understand why a seed investor would ask this question when the valuation is in the $5m range.
Now, I’ve invested in a few unicorns in my investing career, including at least one unicorn that went bankrupt a few years later (I guess that’s a dead unicorn.) But I’ve also invested in a number of companies that have had exits between $100m and $1b that resulted in much larger returns for me, both on an absolute basis as well as a relative basis, than unicorns have for their later stage investors.
I’ve never, ever felt like the “billion dollar” aspiration, which we are now all calling “unicorn”, made any sense as the financial goal of the company. Nor have I felt it made sense as a VC investing strategy, especially for early stage investors. We never use the phrase “unicorn” in our language at Foundry Group and while we aspire to have extraordinarily valuable companies, we never approach it from the perspective of “could this be a billion dollar company” when we first invest.
Instead, we focus on whether or not we think we can make at least 10 times our money on our investment. Our view of a strong success in an investment in a 10x return. Our view is simple – we don’t really view anything below 3x return a success. Sure – it’s nice, but that wasn’t a real success. 5x – now that’s nice. 10x – ok – now we are in the success zone. 25x – superb. 50x or more – awesomeness.
We also know that when we invest in three people and an MVP, we have absolutely no idea whether this can be a billion dollar company. Nor do we care – we are much more focused on the product and the founders. Do we think they are amazing and deeply obsessed with their product? Do we understand their vision? Do we have affinity for the product? Do we believe that a real business can be created and we can get at least a 10x return on our investment at this entry point?
I recognize other VCs have different strategies than us, especially when they are investing at a later stage. Applying our model, if the entry point valuation is $100m or more, then you do have to believe that the company is going to be able to be worth over $1 billion if you use a 10x filter. But in my experience, most later stage investors are focused on a smaller absolute return as a threshold – usually in the 3x to 5x range. And, very late stage / pre-IPO investors already investing in companies worth over $1 billion are interested in an even smaller absolute return, often being delighted with 2x in a relatively short period of time.
So, let’s zone this in on an early stage discussion. Should the question “how can this be a $1 billion company” be a useful to question at the seed stage? I don’t think so. If it’s simply being used to elicit a response and understand what the entrepreneurs’ aspiration is, that’s fine. But if I asked this question and an entrepreneur responded with “I have no fucking idea – but I’m going to do everything I know how to do to figure it out” I’d be delighted with that response.
On April 16, 2013 I wrote a post about the horrific tragedy at the 2013 Boston Marathon. Here’s how it started:
At 3:55pm yesterday I cried.
I was getting ready for a Google Hangout back to my office with my partners and I noticed something about an explosion at the Boston Marathon on twitter. I did a quick scan of Twitter, clicked through to a few links, and realized a bomb had gone off near the finish line.
I went blank – just stared at my computer screen – and then started crying. I called Amy – she hadn’t heard about it yet and told her what had happened. I collected myself and called in to my Hangout. My partners were all shaken also – Seth lived in Boston for many years, Ryan has done several marathons, and Jason just did his first marathon last year in Detroit.
A few days later Brent Hill tweeted that he was going to run Boston in 2014 as a show of strength and did anyone want to join him. Dick Costolo and Matt Shobe quickly joined in and I piled on with a commitment immediately.
This resulted in a group of us running the Boston Marathon in 2014 as part of a team called #boston2014. The team includes a number of well known tech entrepreneurs, including Dick Costolo (Twitter CEO), Brent Hill (Origin Ventures), Matt Shobe (Angel.co), Elizabeth Weil (A16Z) and a bunch of Dick’s gang from Twitter including Chris Aniszczyk, Kelly Flannery, Taylor Harwin, Katie Haynes, Charlie Love, Dale Maffett, and Kevin Weil.
We are all running with the Leukemia and Lymphoma Society’s (LLS) Team In Training which has a mission-to help find cures and more effective treatments for blood cancers. Several close friends of ours have survived lymphomas and it’s a cause I care about.
As a team, we decided to make a big goal of raising $250,000 and I’ve personally committed to raising $50,000. My wife Amy Batchelor and I are kicking off my fundraising with a personal gift of $10,000 from our foundation.
Please support my, and the #boston2014 team effort, to raise $250,000 for LLS. Any amount is appreciated. And keep Boston running strong!
For all of you out there who are wondering, Amy is doing fine. We’re in Boulder, she’s happy, in some pain, but enjoying the delightful impact of Percocet, and making her way through MI-5 Season 8. Thanks for all of the support, emails, and kind words.
I’m about to head out for a five hour run (broken into three separate segments) in preparation for the 50 miler I’m doing in April after I help her take a shower (which ordinarily I would be excited about), but first I thought I’d write some thoughts about a call I had with an entrepreneur yesterday.
The call was about a potential financing he is considering. I’ve gotten to know him some from a distance over the past year and am impressed with what he’s created. He originally just called me for advice on his financing strategy but I started the call by telling him I was interested in exploring leading a round, would be willing to give him advice also, and would quickly tell him if I was dropping out so he could flip me into “advice only mode” if we weren’t going to end up being a potential investor.
We had a wide ranging conversation over an hour about the current state of the business and how he’s thinking about the financing. Several times over the course of the hour he sounded defensive about a particular issue – well – not defensive, but uncertain. He’d frame what he thought was a negative in the context of the way he’d heard it from a previous potential investor (let’s call them BucketHead Ventures) who hadn’t gotten to a deal with the company in the past.
One of these was around churn – he asserted that one of the clear weaknesses of the business was the high churn rate. I pressed him on what he meant and we went through some numbers. He didn’t have a high churn rate at all – in fact, his churn rate after a customer was paying for three months was minimal. The problem – described by BucketHead Ventures as “high churn” – was a combination of what happened in the first three months and BucketHead’s inability to do cohort analysis, so BucketHead looked at absolute churn on a monthly basis rather than on a cohort basis.
In my head, I thought to myself “bucketheads – they pretend to understand businesses like this but have a total miss at a basic level.” The entrepreneur understood the miss, but had internalized BucketHead Ventures feedback and was letting it color his view of his business. And, more importantly, it was making him gunshy. Instead of articulating a powerful story about low customer acquisition costs with minimal downstream churn, he lead with “the worst problem with the business is our high churn rate.”
I see this all the time. While some entrepreneurs think all VCs are bucketheads (they aren’t), other entrepreneurs think all VCs understand this stuff (they don’t). Even ones who seem to be experts, or should be experts, or claim to be experts. Especially the ones who claim to be experts. Often, they are just bucketheads. Listen to their feedback, but don’t let it make you gunshy if you think they are wrong.
Every day I get emails from folks either raising money or telling me about their new idea and asking for feedback. The conventional wisdom is that VCs rarely invest in things that reach them randomly (or “over the transom” in someone’s VC vocabulary – I can’t for the life of me figure out why that phrase hangs around.) However, this isn’t the case for us as 10% of the companies we’ve funded in the past two years were initially from “cold call” email inquiries (Brightleaf and Organic Motion). So – I’m very happy to get a steady stream of random emails – keep them coming!
I’ve noticed a trend toward more video presentations lately. I looked at one this morning and it reminded me of the old writers adage “show don’t tell.” This applies nicely to every pitch you ever do. Specifically, I don’t want to hear you describe what you are going to do, I want to see it. Or – if it’s not built yet, see an example of it. It’s always better to point me at a URL, even if it’s a very rough prototype, as I can usually get a much quicker view of what you are doing by simply playing around.
The video I watched today was a two minute segment of the entrepreneur looking into the camera and describing his business idea. The idea was fine although I could tell within 15 seconds that it wasn’t something we’d invest in given the market he was going after. I ended up watching the full two minute video to see if he ever shifted from “tell” mode to “show” mode. He never did – the two minutes ended and the whole video was the entrepreneur describing his idea.
In my book, this was a wasted opportunity. I could have read one paragraph that contained the same content. The entrepreneur didn’t take advantage of the medium (video) in any way. While he did a nice job on the monologue, he wasn’t trying out for a TV commercial, a TV show, or a movie. He missed the goal – get my attention and hopefully get me to engage to the next level.
For most of the great VCs I know, the way an entrepreneur makes a connection when there is no pre-existing relationship is to generate an immediate interest with the product. That’s what happened for us in the case of Brightleaf and Organic Motion. The entrepreneurs were highly credible, but more importantly we immediately got excited about their products, which caused us to be more interested in going deep and exploring an investment.
This is a repeating theme that for some reason isn’t said strongly enough. The great entrepreneurs (and sales people) “show”. Just think of how Steve Jobs does it. Show me!
The National Venture Capital Association regularly has webcasts aimed at various members of the venture capital community. On January 23rd from 12:00 to 1:00 p.m. Eastern they are having one titled Beyond the Limited Partnership Agreement – Issues For Challenging Times. The description follows:
The current global financial crisis is impacting the venture community in ways that no other economic crisis has. For the first time in our industry’s history, some of the most committed, long term investors in the private equity asset class are reevaluating their commitment, shifting strategy and making the future uncertain. Join us on January 23rd for a provocative discussion as our panel discusses many of the provisions that define the relationship between General Partners and Limited Partner investors, and how these are impacted by challenging economic conditions. In addition, our panel will cover some of the inevitable consequences that may affect the internal operations of the venture firm.
The panelists are:
Howard Rosenblum, Partner, DLA Piper LLP (moderator)
Eric Fitzgerald, Director of Venture Capital Investments, MetLife
Michael Greeley, General Partner, Flybridge Capital Partners
Tom Hodge, COO and General Partner, Frazier Healthcare & Technology Ventures
If you are interested, register directly on the NVCA site to participate.