What every entrepreneur should know about financing right now

Over the past few years, we have seen an explosion of start-up activity as the traditional barriers to entry have come down. The ability to raise money no longer determines one’s fate. With lowered costs to build and run websites, acquire and retain users, virtually anybody can pick up coding and start a tech company.

At the same time, funding opportunities have expanded for early-stage start-ups. More money is flowing in from a new crop of angels, newly wealthy from a number of tech IPOs. AngelList makes it easier for founders to reach angels and there are hundreds of accelerators and incubators to choose from. On top of all this, crowdfunding has now become a viable funding option for many start-ups, particularly those hardware projects that have had a tough time getting funding from the VC circles.

But this boom landscape might change soon.

While the top of the funnel has grown with all the angel and early-stage activity, the bottom of the funnel is still roughly the same size (about 10-20 billion dollar companies/year). We have all heard about the Series A crunch in the Valley (there might actually be up to 2000 companies in the Series A pipeline right now), and perhaps there’s a Series B crunch now too.

Additionally, we need to watch out for two developments on the horizon. First, there will be a consolidation in the accelerator space, with the net effect of reducing the number of available spaces for start-ups. And, we should expect angel activity to drop as new angels discover that returns from their seed investments aren’t so easy to come by.

Any entrepreneur trying to navigate the financing landscape should be aware of the over-abundance of angel money compared with subsequent rounds. You need to assess early on if your business is venture-fundable. Is your opportunity at least $100M? If not, revenue from your customers will be your best source of financing. That’s okay: many great companies have been built by bootstrapping.

There’s a lot of “easy” early-stage money floating around right now, but don’t get fooled into taking seed money if you don’t have a viable path for later rounds. It will just be leading you down the wrong track.

Introducing our latest investment: HandUp, directly helping those in need

Lately, we have seen a growing number of entrepreneurs taking aim to solve the key issues facing our local and global communities. From improving transportation to optimizing neighborhood water usage and encouraging investments in municipal bonds, innovative start-ups are trying to make a difference.

Along these lines, we are thrilled to announce our investment in HandUp, a platform that lets you donate directly to a person in need simply by sending a text. San Francisco-based web designer Rose Broome and mobile developer Zac Witte created the app to address two key challenges in the current system:

  • While individuals and households donate $26 billion to human services like shelters and food banks, there is little transparency as to how effective these donations are, and how much of it actually goes to those in-need. We often hear stories about the high overhead associated with many non-profit organizations.
  • We all want to directly and immediately help those in need within our community – for example, when we see a panhandler standing on the street corner. However, it’s hard to know if this is the best way to help that person and if the cash will go to the wrong purchases.

HandUp solves both of these issues. People in-need sign up for a HandUp membership through nonprofit partners already working in the community. Donors can contribute to a specific member through their web profile or SMS. Funds can only be used at a HandUp partner organization (i.e. Project Homeless Connect) for food, medical care, gift cards to grocery stores and pharmacies, and other basic needs. HandUp is currently working in San Francisco and plans to expand into other cities by end of the year.

The company has been featured on CNN and Bloomberg News, and was named one of Fast Company’s most innovative startups.

Rose and Zac are alumni of Tumml, the first urban ventures accelerator. We’re incredibly excited to be working with them on this important mission. Version One is co-investing alongside SV Angel and some prominent angels.

The beauty of HandUp’s approach is that it’s simple, personal, and yields virtually instantaneous results. It fits into Version One’s investment thesis that civic startups need to innovate and get traction outside of the current system (Boris earlier blogged about the opportunities to disrupt government earlier).

To learn more, visit http://handup.us or follow @HandUp on Twitter.

Can you build “Silicon Valley” companies outside of the Valley?

The big debate among tech circles has always been if it’s possible to build a “Silicon Valley” company outside of the Valley. Is Silicon Valley a physical place or a state of mind? Can upstart ecosystems in New York, Los Angeles, Toronto, or Seattle churn out tomorrow’s billion dollar tech companies? Considering a large proportion of Version One’s portfolio is located outside Silicon Valley, I absolutely believe that major tech companies can emerge outside of the Silicon Valley bubble. But there are some considerations…

When it comes to hiring, start-ups located outside of Silicon Valley have an initial advantage, because there’s a lot less competition for engineers. Smaller start-ups in Silicon Valley, particularly those in un-sexy markets, have a tough time drawing in top engineers and designers. A start-up located near a strong university system, like Toronto-Waterloo, has great access to talent without having to compete with 20 other companies and ballooning pay scales. As a result, they can get the talent they need while keeping their payroll expenses relatively low. Starting a company is one thing, but scaling is much tougher outside of Silicon Valley. While smaller ecosystems provide a strong pool of engineers and designers, they’re lacking senior talent. It’s relatively easy for a company to scale to 20-25 employees in Seattle, but when a start-up is ready to find its first VP of Sales or Marketing, it often needs to look beyond the local area. In many cases, a start-up will either need to relocate or open a second office in order to attract the right senior level talent.

The other consideration is the type of business. B2C start-ups typically have more flexibility for where they can be located, while enterprise oriented startups need to be where the customers are…and that means Silicon Valley. B2B start-ups need to have at least sales and marketing based in the valley, if not their entire operation. Keep in mind that SaaS and consumerization of IT are changing this dynamic slightly. Today, it’s a major advantage to be able to drive down 101 to meet your customers, but just 5-10 years ago, it was mandatory. Of course, all these points are generalizations.

The truth is that a great company can be built anywhere, just as building a viable tech start-up is tough no matter where you are. In many cases, success comes down to the founder’s ambition and mindset. Today we’re seeing more founders start a business on their home turf, come to Silicon Valley for an accelerated program like Y Combinator, then bring the Valley mindset back home. As more Valley-based investors and incubators reach out to assist founders across other ecosystems, the Valley can just be a state of mind.

What excites us in consumer healthcare IT?

Last December, we published our thoughts on the healthcare market in a VentureBeat article: “The health-tech booster shot: bringing health care into the 21st century.”

That was December 2013, and digital health funding for the year exceeded $19B with 195 venture deals (where over $2M was raised). These numbers were up 39% compared with 2012, and a staggering 119% compared with 2011. If you’re interested in more facts and figures, check out Rock Health’s annual report where statistics are segmented by stage, geography, and more.

Now that we’re halfway through 2014, we continue to see venture capital pour into the healthcare sector.  Large raises in recent months include Doximity ($54M), One Medical Group ($40M), and Omada Health ($23M).

So what has Version One been up to amidst this whirlwind of VC activity? While we have yet to invest in a second healthcare startup since Figure 1, we have actively refined our thesis to focus on two key opportunities:  1) patient-to-expert networks, and 2) patient health data.

1)  Patient-to-Expert Networks

When we get sick or feel pain, the first thing we do is Google our symptoms. After all, self-diagnosing with a few keystrokes is faster, easier, and cheaper than heading out to the doctor’s office. Traditionally, Google has returned search results from WebMD, Mayo Clinic, and other websites where the medical information is delivered from the “top-down.” The content is static, non-personalized (i.e. everyone typing in “I have a headache” will get relatively the same results), and can be inconsistent.

This traditional online “diagnosis” is being disrupted by a wave of crowdsourced communities.  More and more, we are seeing patients connect with other patients for support and information sharing (i.e. Crohnology and PatientsLikeMe). We’re also seeing platforms that connect physicians in an effort to democratize medical knowledge (i.e. the photo sharing app, Figure 1).

But what about a platform that connects patients with doctors?

To date, we have seen crowdsourced communities like CrowdMed and HealthTap gain great traction with both parties.  Patients are able to receive opinions free-of-charge and doctors are happy to share their knowledge for both altruistic and lead generation purposes.  We have also seen a rise in marketplaces from search and booking engines like ZocDoc and BetterDoctor, which help grow a doctor’s pipeline of patients, to on-demand general practice like Doctor On Demand (via video) and First Opinion (via text) as well as specialists – namely dermatology (via images) and psychology. In addition, there are concierge services like Medicast (an “Uber” for doctors) and destination healthcare marketplaces that focus on dental surgery, plastic surgery, LASIK, and joint replacements.

These examples are a few of many that validate how technology can increase affordability of care and provide more accurate diagnoses without a loss in quality.  It will be exciting to see if there will be one company that “wins it all”, or whether there will be many winners.  And how will the winner(s) look?

We feel that the leader in this category will be capable of scaling triage or diagnosis much faster with machine learning and/or the unlocking of shared medical knowledge from the network that would have to be built into this platform.

2)  Patient Health Data

When it comes to patient data, there are two trends at play. First, with the Quantified Self movement, data is being gathered for anything and everything from caloric intake to number of steps taken, oxygen levels, REM sleep, and much, much more.

At the same time, the industry is also starting to move away from the data silos that have historically locked patient data within a hospital or practice. The government and its Meaningful Use initiatives is a key driver behind this.

With all this new data, there’s an enormous opportunity for someone to become the “Mint.com” of health data. However, the key questions are how do we get data collection to cross over into the mainstream? How do we encourage people to track their health data, whether it’s self-collected or doctor-collected? To date, we have seen two “forcing functions”:

a) Hospital/Enterprise-driven: physicians, hospitals, employers, and insurers are encouraging patients to look at their lab results and share their self-collected data on their patient portals. Validic and HumanAPI sit on the backend of these portals, connecting clinical and fitness wearables, apps and in-home devices to an EMR.

b) Patient-driven: There is a growing number of web and mobile apps that give patients a secure and convenient way to collect, consolidate, analyze, and store information on medications, allergies and lab results, across and from all different EMRs.

Given that we have a better understanding of business models that sell directly to the end user, we naturally gravitate towards companies taking the second approach.  So far, we have seen that people with chronic diseases and health concerns are quick to adopt technology: having all of your medical information digitized and accessible through your smartphone or tablet is far more convenient than carrying a physical binder of lab results from one doctor’s office to another.  We look forward to seeing these users champion these apps and ultimately inspire everyone to own their health data.

Final thoughts

As the population ages and healthcare costs continue to grow, there will be a greater emphasis on technology’s role in managing health and wellness. While patient-to-expert networks and patient data are the two areas we are currently focused on, our thesis is ever evolving. Are there any other areas or companies that should be on our radar? What do you think the go-to health app will be?

Introducing our latest investment: Dwellable, mobile-first vacation rentals

Sometimes, you need to wait a long time for the chance to invest in an outstanding founder.

I met Adam Doppelt five years ago. He’s the co-founder of Urbanspoon, the popular restaurant review site and app. He also co-founded Cubeduel, a site that lets you rank your co-workers and Strangeberry, a digital media startup that was acquired by TiVo in 2004. Unfortunately for myself and other investors, Adam never took outside money to build his companies.

But finally the day has come and I’m happy to announce that Version One – together with our friends at Maveron – is leading the seed round for Dwellable, Adam’s latest gig. Dwellable helps people find private vacation properties to rent, targeting a market defined by HomeAway, VRBO, and to some extent, AirBnB. What makes Dwellable different is that it provides the best mobile experience. Anybody who has ever tried to find a vacation rental online knows how terrible the system is… terrible looking sites, clumsy navigation, out-of-date or inaccurate calendar information, bad photos, etc.

Dwellable’s listing pages are cleanly laid out and intuitive. The calendar information is included right in the listing body (so you know right away if a place is available for your vacation or not). In addition, Dwellable is the only company to provide a dedicated tablet app.

What’s really smart is that Adam hired Kirby Winfield as CEO to help build a big company, while Adam can focus on building a great product.

It will still take some time for Dwellable to build out its selection of listings, but I am truly excited about the state of the current product, the product that is to come, and the opportunity to work with Adam and Kirby in building an amazing company in the travel space.

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