ff Venture Capital and HBS Angels of New York are happy to be co-sponsors of Flashpoint’s upcoming New York Demo Day, Wednesday, January 18, 2012, 2:30 PM to 6:00 PM, held at Union Square Ventures.
Flashpoint is a startup accelerator program at Georgia Tech. Some of their portfolio companies look very promising. The current crop includes:
I hope to see you there! RSVP
Fundraising is not just limited to companies. Venture Capital firms have to do this as well. It is an interesting process and you get to meet fascinating people. Potential limited partners (or LP’s as we call them) come to the table with a set of beliefs that are, well, sometimes peculiar and rarely challenged – after all, the VC that is raising capital does not want to upset their potential investor. The net result is that certain “truths” often have to be addressed and given consideration, such as:
The underlying issue is that many LPs feel they know the fundamental requirements of a successful VC firm, have boiled it down to a few precepts, and anything that does not meet those precepts cannot work. This is the same logic as reportedly used in the argument that bumblebees cannot fly. Supposedly during dinner a biologist asked an aerodynamics expert about insect flight. The aerodynamicist did a few calculations and found that, according to the accepted theory of the day, bumblebees didn’t generate enough lift to fly. Once he sobered up, however, the aerodynamicist realized what the problem was: a faulty analogy between bees and conventional fixed-wing aircraft. Bees’ wings are small relative to their bodies. If an airplane were built the same way, it’d never get off the ground. But bees are not like airplanes, they are like helicopters.
We believe that the only way to measure success in venture capital is via returns, not firm structure: flight and not ones assumptions about flight. Now success can also be due to simple luck, but a long consistent track record would indicate process has something to do with it. In fact, a continually refined process. For us returns are a function of process which breaks down into finding great companies, selecting those you want to work with, and then determining the amount of capital to deploy each time there is an opportunity to invest, or simply:
Success = returns = deal-flow + selection + deal negotiation + portfolio management
Far too much discussion is based on deal flow, and in particular the notion, or belief, that hot deals lead to successful companies. As a firm, we are wary of hot deals and far prefer ones that are ‘cold’. Why? Well, as we invest at an early stage, we want to invest ahead of an opportunity, preferably 3-5 years ahead. As such if a deal is hot, then the idea is likely of the now and not the future, and the company will not have the time to grow to the right size and heft to dominate that opportunity. Successful companies, like successful people, often have tough childhoods and adolescent periods – there is no silver spoon. Deal selection is simply tougher that latching onto the next hot idea, the theme-du-jour, the company with the cool kids or the cool co-investors. We love cold deals with no ‘social proof”, just amazing CEO’s and management teams.
Larger funds are at a triple disadvantage vs. smaller funds:
(A) No professional active money manager should be too diversified, and so focusing on investments below 0.5% of their capital base is asinine. No fund manager can seriously do so as fund management is a matter of balancing time on a portfolio position vs. the potential return. The capital that is most scare is intellectual capital.
(B) The people working at the fund focused on seed investments tend to be the most junior. They will feel they have been given the short-stick opportunity, as whatever they do they feel that they cannot move returns for the whole fund. The fund will also feel conflicted out of putting larger amounts of capital to work in competitors when the early stage company almost inevitably pivots in a space that is just emerging.
(C) The tool-set for early stage investing is simply different. The toolset that makes for a typical partner at a $500mm VC fund is different than the toolset needed for early-stage deals. The early stage toolset is way more qualitative than quantitative.
The bar of having ”a broad deep team of senior investment professionals” is interesting – after all who can argue that more talent is better. After having worked at Goldman Sachs and some other very large companies, I fully understand the value of a large team, but the downside of a large team is that it leads to groupthink and a consequent conservatism – remember the quote about a camel having been designed by a committee. In addition, a large team creates a higher cost structure that requires a larger fund, which is counter to our approach.
So many people manage money so that they can manage more money. The management fee that is insignificant for a small fund becomes a raison d’être for a large fund. Their objective is to manage the maximum possible so that they can have significant asset based fees and be less reliant on performance fees. They become asset gatherers. One of the most successful asset gathering strategies is to specialize. After all, a specialist will know much more about something than a generalist. That leads to higher returns, right?
As a firm we respectfully disagree, especially with regard to the world of early-stage investing. This is despite some academic research on later-stage investing that has indicated some advantages to specialization for later-stage funds; see “The Performance of Private Equity Funds: Does Diversification Matter?” Specialists focus on areas they think that investors want to invest in today, and so are always proposing the theme-du-jour. In early stage investing, this is a bit like fighting the last battle. Early stage investing is a long-haul game, and not one that should be tied down to a tantalizing theme during the capital raising period. Technology moves too fast to tie a successful fund down like that. Specialist investors have to turn down investments that they think are going to be successful if outside of their theme. Specialist investors that are hands-on cannot invest in the best companies in the space; as they might compete. If they are not hands-on then they cannot help their companies succeed and have to watch from the sidelines. Specialist investors have one hand tied behind their backs.
When my partner, David Teten, wrote his research study on best practices in deal origination, one of the people he spoke with was Bill Morrow, formerly COO, Mid Europa Partners, a European private equity fund, which is comprised of a team of 30 people from 19 different countries. Bill observed, “We have deliberately not chosen a country-specific origination model, because we’re afraid of adverse selection. If you pay someone to eat what he kills in Romania, he may bring something not palatable back from Romania because that is all that was available.”
Bill went on to say: “Similarly, we’re debating the extent to which we should be sector-focused. We’re wondering to what extent a well-defined sector focus is good or bad. It comes with some logistical issues. If your focus is retail, and nothing is going on in retail, then you’re either a wasted talent or again face adverse selection. We want our people to be fungible. We don’t hire the Czech investment professional just to originate Czech deals, although we recognize he or she will be more likely to source deals in that geography.”
Similarly, in Robert Finkel’s excellent book, The Masters of Private Equity and Venture Capital, there’s an interview with John Canning, chairman of Chicago private equity firm Madison Dearborn Partners LLC. He observed that during the telecom bubble, his team thought of creating a dedicated telecom fund, because they had made so much money from telecom investments. Madison Dearborn did not, and were very glad about that decision with the advantage of hindsight.
We are unapologetic generalists and invest for returns. We think that limited partners actually want returns and we work to deliver them. Specialization is a sub-optimal strategy for early stage venture capital.
So, how do you measure success in the space? What are the best proxies for future returns? We maintain it is having a philosophy of investing for returns in a fund with aligned interests and a proven track record that is way above the median for the space. Returns are all about looking at a ton of deals and finding the few management teams you want to work with, then working with them and giving them more capital as they succeed. It is a long game, it is an unconventional game, and it is tremendous fun.
Look out for the bumble bees.
 Bumblebee takeoff by Manechka |
I am delighted to announce that ff is expanding significantly. Firstly, we are very excited to add David Teten as the second Partner in our history and Michael Yavonditte as a Venture Partner in the Firm. David is Chairman of Harvard Business School Angels New York and an experienced entrepreneur. He has founded three startups and sold two, most recently selling Circle of Experts to Evalueserve. Michael is CEO of one of the fastest-growing New York statups, Hashable, and was CEO of Quigo (sold to AOL for a reported $340m), in which we were a seed investor.
These are two of the most talented and experienced entrepreneurs in New York and our Firm is privileged to be associated with them. They bring great talent and heft to what is becoming one of the leading super-angel/micro-VC firm in New York. As our assets under management are growing fast, it was the right time to add these top-notch partners to continue our high-involvement style of investing that we believe correlates with the best returns. We have room for a few interns this fall to support our enlarged team; application information is on our careers page.
Second, we have restructured our website to address questions we are often asked, such as where our portfolio companies are located, what themes we invest in, and to provide resources and links for entrepreneurs. We plan on adding many features to the site over time that can help startups, well, start up.
Finally, we are in the process of building out over 5,000 square feet of space in New York to house ourselves as well as a number of companies we are invested in, such as Parsely and Phone.com. We might have a few desks available for rent for likeminded members of the NY community, subject to our portfolio companies’ growth. If you have interest in joining us in our space, please reach out and let us know. We have some very unusual ideas for how the space will be designed – watch our blogs for details.
This is a new chapter in our Firm, but a continuation of process to build an awesome contributor to the New York and global startup community. Since 1999, we have made over 100 investments in over 35 companies, and from the beginning we have been highly focused on generating industry leading returns. Among our most successful seed investments that have reached maturity are Cornerstone OnDemand (which raised $137m in a March 2011 IPO, ticker CSOD) and Quigo Technologies. We have a large crop of exciting growth companies that are starting to come into their own.
We are entering a new era. A time when great wealth is being created, and old fortunes destroyed (but not let us dwell there). A time of convergence and disruption that has not been seen in anyone’s lifetime.
In the late 90′s it was all about expectation and a belief that disruption of existing businesses was imminent; well, a decade or so later it now is. This is why the current (and upcoming) crop of Internet leaders are, well, generating revenues and profits. This is not about eyeballs anymore.
There are three main drivers, and their convergence is unlocking new money making opportunities at an increasing pace:
(1) existing established companies in many fields are being materially impacted by new secular disrupting technology;
(2) the establishments of new cheap, accessible distribution platforms; and
(3) the willingness of large (and small) enterprises to experiment with new way of doing things and work with unestablished companies.
Examples of new secular disrupting technology: SaaS services, cheap cloud storage and processing, powerful mobile platforms (phone and tablet), new touch and motion interfaces, ubiquitous API’s, social platforms (i.e. people giving up privacy for fun or ease of access/use), and location based services.
Examples of new cheap, accessible distribution platforms include iOS iTunes, Android, Facebook, Google Apps, and YouTube.
And, finally successful execution by high profile companies, low cost of experimentation, an ample supply of smart unemployed people and a societal recognition that tech is cool, as evidenced by The Social Network.
I cannot think of a time when so much disruption was happening from so many different technologies impacting so many different parts of the economy. Thus I am not in the “It’s a bubble” camp, but in the the “It’s a bull market” camp. Is this driven in part by cheap money, by a lack of investment returns elsewhere and by a sense of glamor, but those are the ingredients of a good bull market. If I had to guess, I would say it is ’96 or ’97 again and we have a few more years before a blow-off top that will be called The Second Internet Bubble, or something like that. Right now it is rational to invest in start-ups, though at some point it might make sense to step back. As a professional investor I have to understand when to participate and when to pull back and now is the time to invest and help companies, not hold back. Real wealth is being generated, real jobs created and real change is happening.
Innovation is very much alive in America and gives one great hope for the future of the country.
[Source www.500px.com]
I co-joined these two blog entries as no discussion of what is happening does not involve someone raising the concern that we are in a bubble right now. I think, and have argued above, that that is not the case…but, it most likely will be. I can see such a thing happening three or four years from now, when everyone is sucked into the private markets and quite comfortable with their highly illiquid (but seemingly liquid) investments in companies they do not understand and yet they seem to be making money.
Bubble require liquidity and liquidity in private investments is restricted by many constraints, though the following are worth highlighting:
(1) regulation that only allows accredited investors to invest;
(2) regulation that restricts number of shareholders to 500, or burdensome reporting requirements kick in;
(3) lack of information related to how the company is performing; and
(4) institutional investing by mutual funds, brokers, etc. only make size in units of $10mm and so cannot happen until the market caps are sufficiently large (probably $500mm minimum).
I suspect that over the next few years (1) and (2) will be loosened, and (3) will stay the same, but investors will not care. (4) is the real indicator of where the bubble will be. It will be when mutual funds start to buy into private companies pre-IPO in a hot space, it will be when the public can participate pre-IPO through funds set up by the Bulge Bracket firms, it will be when secondary share trading grows to the point that “everyone” starts doing. These will create a false sense of liquidity at the $500mm market cap level and above, and that will give everyone some comfort until it goes away. Professional angels and VC’s will probably be more than willing to sell into this frenzy and take advantage of the liquidity provided. Fortunes will be made and fortunes lost, but the bubble will have to be later stage. Can this bleed down to the early stage? Perhaps, but far less so. The numbers are just too small.
Time will tell, but my thoughts are now date-stamped by this post.
[Note to self, check back in 3 years.]
I was watching Mark Suster and Tom McInerney on This Week in Venture Capital mainly for fun, though Tom is a good friend. If you have not watched it you should as it is highly engaging. Well into the discussion Tom and Mark delve into privacy and Tom mentions that many teens have moved to having more than one Facebook account. This was the same week that Hashable re-tooled their privacy settings, moving from a very open public followship model to an ‘Inner Circle’ model. All of this got me to thinking further about privacy in the online world.
For many years people would designate themselves on the web using a pseudonym such as sexybear103@aol.com. It was not until Facebook, LinkedIn and the like coerced users to register using their real name that the social network revolution really started to matter. Since then people have be educated to be online using their real name. This has been important for many reasons: (1) it allows social networks to function; (2) it builds trust and improves overall behavior – visit a comment stream that forces real names vs. one that does not and you will see a huge difference in civility and relevance/quality of discourse; (3) it allows algorithmic psyco-analytical companies to flourish, such as Klout, that are a benefit to consumer in many ways; (4) it enables information to find people via crowd-soiurced trusted networks (Okay I simply should have said Twitter!) rather than have to search for it, which is bad news for Google.
But, but privacy gets in the way, or at least defines the usage of the service. Twitter is clear: it is open, there is no privacy (even DM’s can be read by 3rd parties from their API’s), it does not pretend to be private and so it is like walking up to the town square, picking up a soapbox and shouting. There is no pretense that something tweeted is private. Facebook pretends: it wants you to think that what you say/share/do is private to you and your intimate circle of ‘friends’, but it is not; and even if you shut down most of your privacy settings you are dependent, sometimes, on what privacy settings your friend’s have. People want to share and so they are resorting to pseudonyms on Facebook which, well, reduces some of the utility highlighted above. Hashable has moved from defaulting all people checkin’s from being public (or private) to being shared with your Inner Circle (or private). This, for me, massively increases the utility and going forward all the CEO’s of my portfolio companies and my employees will be in my Inner Circle – we will share with each other our meetings and what we are getting up to and I am sure there will be many occasions where this serendipitous sharing will lead to new ideas, new connections and new business. Hashable will add real utility from getting privacy right. Others will be shut out, but that is fine, this information was not easily shareable before. This seems to me to be the optimum level of privacy for me to get the most out of Hashable. I am sure it will evolve, but I like this latest iteration.
Social privacy should mimic actual privacy, and so be different for different services. In the real world you compartmentalize what you know/think and who you share it with. We all have a private self that we keep, basically, to ourselves. Then there is a public self that we are willing to share with everyone – though some people have multiple public persona that they like to keep separate, e.g. fraudsters and bigamists. Then there is everything in-between: some people have just one setting for friends and family, and others have different settings for different groups that don’t intermix e.g. their guy friends, or work colleagues. The online world has to mimic this, and so a service either has to address just one of these privacy groups, of be uber-flexible if it wants to cover more than one. It is clear that I think Facebook is attempting and failing to do this.
Services will continue to evolve and getting social privacy right is essential for them to increase their utility to us as people and them for engagement.
I really did not want to post about the Yuri Milner/Y Combinator/SV Angel announcement, but felt that there was something lacking in the debate.
Like Roger Ehrenberg I think this is a “ho-hum” announcement, but time will tell. There are various surveys and analyses out there, and all the numbers are slightly different, but the order of magnitude is that there well over 100,000 angels making over 50,000 investments for a total amount of $15bn+/-, each year. One angel’s investment in 43 startups for $6mm does not move the needle. It makes GREAT news, however and there are already four TechCrunch articles about it. It seems the valley is, well, narcissistic.
There is also the law of unintended consequences: does this mean that talented folks that are hands on and helpful to startups will avoid YC in the future if they feel that they cannot invest at fair prices. Time will tell. A rigged game does not attract talent, it attracts fools. You also have to wonder if Yuri is buying options, then the companies must be selling them. My time on Wall Street told me selling options can be a sucker’s game. And then there is the questions as to whether there be a signaling issue? Would you invest in a company that Yuri has decided to pass on in a later round?
Overall, I can understand the attractiveness of the money, but there is no such thing as a free lunch.
Now that I have your attention with a grandiose title, I am going to share with you an iPad tech support story: I am in London and had to switch out my iPad – I could not get the O2 sim card working for UK wireless connectivity, so Steve at the Genius Bar switched out my iPad, and voila, it now works. Usual Apple approach of not wasting my time if they cannot find out why something does not work – amazing service.
But I am far from home: how useful is this without my applications and data? Very! I might not have a few movies for the flight home, but Virgin has a decent selection. Meanwhile I simply downloaded my programs for free: SimpleNote, DropBox, DropKick, Pages, Keynote; I downloaded my contacts, bookmarks, calendar, notes from MobileMe; I downloaded my email accounts from Gmail, with full IMAP history. Within no time I had literally everything except a few movies. When I get home a quick sync will restore my layout and settings just as I had them before this trip.
This is the future of computing. Disposable hardware, part-cloud-part-local data and applications. Data and applications reside nowhere and everywhere at the same time. It is sweet, productive, efficient, device independent and, well, magical.
An innocent question, and fundamentally too wide a question for an objective answer. For me a startup is a new company run by bright, driven individuals that want to change the world. The see the current set-up as wrong and that they can fix it, and make a ton of money in the process. They are fundamentally unreasonable people, that face rejection, a lot of rejection. In fact, the better the idea they have the more rejection they have – good ideas are not easily accepted, they seem to be strange or trivial or shocking.
“People won’t do that”, “I find that annoying”, “who would want that?”, are all signs that you are onto something big.
Never underestimate the weirdness of a big idea.
This post is a follow up post on our systemic dependence on the Internet, and is as a result of general encouragement of Phil Hotchkiss.
It is estimated that as we exit 2011 50% of phones will be smart phones. So what? Well, just as more and more of our real-world interactions are being digitized and replaced with web-enabled alternatives (listening to music, reading books, watching movies, playing games, learning, research, communications, etc.) so the devices we do this on are “converging”. It is not just media that is being digitized but also the guts of many distinct devices.
In a few years a dedicated camera, GPS device, pedometer, watch, phone, etc. will seem twee and quaint. The iPhone (and Android phones, and Windows 7 phones etc.) is the Swiss army knife of phones – add in the obvious combinations then add in glucose monitors, payments, and thousands of other specialized devices that are on their way. The iPad (and other tablets as they come to market) will do the same for devices where that form factor makes more sense.
I see the physical device market coalescing around four primary form factors: phone, tablet, laptop and desktop with each of these having powerful processors, tons of storage (local and virtual) and always connected. People will gravitate to owning, probably, three of these depending on their needs and they will sync up so that data on one is simply, like magic, on the other.
Will my grandkids wonder at all the electronics stuff we take/took for granted as everything becomes software and data? We live in a brave new world of interdependence where we lose connectivity to what it is we use – we will soon have no idea as to how to construct the devices that we conduct our life with. Einstein rightly said:
| I do not know how the Third World War will be fought, but I can tell you what they will use in the Fourth – rocks! |
There is increased discussion about the imminent end to newspapers, such as the quote by the publisher of the New York Times, Arthur Sulzberger Jr:
Asked about his response to the suggestion that the NYT might print its last edition in 2015, Sulzberger said he saw no point in making such predictions and said all he could say was that “we will stop printing the New York Times sometime in the future, date TBD.”
One aspect that has not been covered in the discussion is the assumption that there has to be an underlying infrastructure that is ubiquitous for to make sense. This infrastructure has to be bottom quartile accessible: i.e. dirt cheap, easily accessible and usable by even the most stupid in the population. Think disposable $10 iPads, that run for 100 hours on a charge. Ok, it might not have to be that extreme, but newspapers work because they reach everyone, not early adopters and mainstream, but 90%+ penetration.
Newspapers will go away, but once we have tomorrows technology – it might be iPad 6 or Android 10, so we have a sense of the path, but today’s technologies will not be the new platform – they will just help destroy the old platform. It will take time, and, as with most platform changes, longer than most consider reasonable. But, by then the future platform will be in place.