Posts Tagged: marketplaces

How we can improve the odds of finding unicorns

It was my first day at Version One when I realized that finding “VC-fundable” startups would not be easy.  Aileen Lee, founder of Cowboy Ventures, posted a brilliant analysis on why VCs have to look for billion dollar companies (“unicorns”) to deliver acceptable returns, and how rare it is to invest in one: “The odds are somewhere between catching a foul ball at an MLB game and being struck by lightning in one’s lifetime.”

However, despite these kinds of odds, I’ve learned there are several things we can do to improve our chances of finding the elusive unicorns:

1.  Data helps filter through the noise.

With nearly 30,000 startups on AngelList, there’s a lot to sort through. Nowadays, we can learn virtually everything about a company online, from its tagline to founder backgrounds, fundraising history, current investors, and social media traction. However, while data is ubiquitous and free for the most part, it is also fragmented, inconsistent, and seemingly disparate. This makes it laboriously difficult to identify rising stars and make comparisons within a specific vertical.

Fortunately, web apps like Mattermark, DataFox, and PitchBook wrangle, clean and organize the data so that we can focus on analyzing it. We can whittle down those 30,000 companies to a more manageable number by filtering for business models, regions, state, co-investors, Twitter mentions, Facebook likes, LinkedIn connections, iTunes downloads, unique website visitors, and/or other criteria that align with our investment thesis.

2.  Be thesis-driven.

We are often asked what industries we invest in, but it is more important to have theses on business models that serve as strong filters. At Version One, we have 6 investment themes (and more to come – stay tuned):

  • Vertically integrated commerce.  Controlling the entire supply chain brings unique product lines directly to the consumer at lower prices and better margins.
  • Vertical SaaS.  This approach helps capture the market more quickly with lower CAC and capital requirements.
  • Online education.  Mobile and social product experiences are making learning more affordable, efficient, engaging and effective.
  • Hardware renaissance.  Numerous innovations (e.g. Raspberry Pi, Arduino, etc.) are making it easier to develop hardware products.  We are interested in platforms that power this space.
  • Mobile marketplaces.  The ubiquity of mobile makes it quicker and cheaper to connect buyers and sellers.
  • B2B marketplaces.  There has been a lot of focus on B2C marketplaces, but there are still tremendous opportunities left in the B2B space.

3.  Manage your time wisely.

We challenge ourselves to think about tools that we can use to organize and manage our meetings, events, pipeline and readings.  To reduce redundancy in deal flow, for instance, we collaborate online as much as possible with web apps like RelateIQ.  To consume content quickly, I am a power Feedly user and Twitter discoverer.

4.  Be kind and generous.

When most of your time involves working with others, perhaps the most important thing you can do is build genuine relationships.  Because every meeting is a learning opportunity, I make the effort to thank others for their time by being generous with my own.  With entrepreneurs, I try to provide thoughtful feedback, always remembering that they are hardworking individuals with the courage to build a company.  With colleagues, I take note of their interests and share articles or startups with them.

Also, in a world dependent on introductions, I often thank those who make them on my behalf.  For example, in addition to writing the common email line, “Thanks for the intro to Cassidy, David (moving you to bcc)”, I follow up with the “Davids” after meeting the “Cassidys” with notes like “Hi, David.  Thank you for connecting me with Cassidy.  I learned about x, y, and z from her.”  This is a tangible display of appreciation that helps keep me in mind for future connections and deals.

Since writing my blog post on “Why VC is a perfect fit for me” on my first day, I have enjoyed every moment of this work.  I owe this to everyone who has contributed to my learning.  Thank you.  Now to get back to looking for unicorns…

Funding goes global: location is no longer your financing destiny

If we look back ten years, the venture world was quite different. Investors weren’t too keen on investing out of town. And given the fact that the majority of top investors were congregated around Silicon Valley, many entrepreneurs felt compelled to move to the valley to start their business. It was much harder for a “remote” company in the Mid West, Europe, or Canada to draw any attention to themselves.

A recent interview with Union Square VenturesAlbert Wenger reminded me how much things have changed in the past years:

 I’m less interested in the regional differences than I am in the fact that it’s now possible to build very large, global businesses from anywhere in the world…The Internet is global. Geography is no longer the destiny it used to be.

And what is true for start-ups is also true for venture capital firms. The Internet has disrupted traditional geographic barriers for venture capital in the same way and world-class investors are emerging outside of Silicon Valley.

Look global and local

What does this new dynamic mean for today’s start-up seeking funding? In short, you’re going to want to look for the best funding partner (or collection of partners) possible, rather than just focusing locally.

Many firms have developed specific areas of focus and these type of investors can be extremely helpful in strategic matters. For example, NYC-based Union Square Ventures has built up the most experience around “large networks of engaged users”; Berlin-based Point Nine Capital is one of the strongest early-stage SaaS investors; and version one ventures probably has more marketplace investments than most seed funds.

Thesis-driven investors, like USV or version one, can be instrumental in helping you navigate questions like product roadmap or fundraising because they work with similar start-ups in your space and really understand the area.

Likewise, local investors are usually better positioned to provide more hands-on help. One of the biggest advantages here is in hiring: you can pull from their local network and local investors can even interview key hires in person. At the end of the day, you’ll want to find the best partner(s) that meets your specific needs and situation. In some cases, this is local; in others, it’s a remote expert; or a mix of both.

One final word of caution: if you’re going to go with out-of-town investors, you’ll want to see that they have already made investments outside of their own location, so you know they can communicate and operate well virtually (and are willing to travel to their portfolio companies). In other words, you don’t want to be the trial run for a remote investment.

N.B.: AngelList is a great way to identify investors that might be a good fit for you but it is probably not yet the best way to pitch and close them. Getting warm introduction from a trusted source still has a much higher likelyhood for conversion that simply sending messages on AngelList.


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Key investment themes

Every venture capital firm narrows its investment focus one way or another…perhaps by geography, sector, and/or stage. In some cases, it’s the result of conscious planning; in other cases it’s a natural evolution as a fund starts making investments.

For example, at version one ventures, we’re focused on early-stage (seed and Series A) opportunities in e-commerce, SaaS, and marketplaces/platforms across North America. Even that categorization covers a rather large swath of today’s start-ups, and it was only natural that this broader focus was narrowed down to several particularly strong opportunities and areas of interest.

Looking back at the past 18 months of version one’s activities, five key themes have emerged:

1. Vertically integrated commerce (investments: Julep, Frank & Oak): Last September, I wrote an article for TechCrunch outlining why vertically integrated retailers represent the next wave in e-commerce. By controlling the entire supply chain, these companies bring products directly to consumers from the factory without the bloat of the traditional retailer. This translates into high-quality products (whether eyeglasses or t-shirts) at significantly lower prices and better margins. In addition, a unique product lines means no competing with Amazon.

2. Vertical SaaS (investments: Frontdesk, Jobber): In the new era of enterprise software, the winners will be purpose-built, vertically sliced tools. Why? The vertical approach helps companies capture market share more quickly than if they were trying to build out a broad, all-things-to-all-people solution. It also means lower customer acquisition costs and lower capital requirements.

3. Online education (investments: Top Hat, Talentbuddy): There’s a big opportunity to disrupt the current education market. Mobile and social product experiences are making learning more affordable, efficient, engaging, and effective for all involved.

4. The hardware renaissance (investments: Upverter, Tindie): Hardware start-ups have long taken a back seat to software, but today it seems that everybody is talking about the Maker Movement. Numerous innovations (like Arduino Robot Kit, UDOO, and Spark Core) are making it easier than ever to develop hardware. Today an entrepreneur can walk into a VC meeting with a prototype from a 3D printer and proven market interest on Kickstarter. While version one hasn’t directly invested in a hardware start-up, we’re focusing on the platforms that are powering this hardware revolution.

5. Mobile marketplaces (investments: Clarity, Instacanvas, and one soon-to-be-announced investment): The near ubiquity of mobile is reshaping the way marketplaces are created and operated. As Matt Cohler noted, mobile devices make it “vastly quicker and cheaper than ever before to ‘wire up’ both sides of a market.”

I am still excited about the potential of all five themes, but it’s inevitable that in the coming year, some areas will evolve and new ones will be added.  Stay tuned…

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2012 Recap and Final Close at $19M

While crunching the data and reflecting on the past year, it’s clear that 2012 was busy. Version One Ventures made eleven investments, including three angel investments that rolled over into the fund.

Here are some of the more interesting details to share about our activity in 2012:

  • Version One invested more than $2.5M in 2012
  • Our focus centered around three investment areas: e-commerce (Frank & OakJulepInstacanvas), SaaS (JobberTop Hat Monocle), and marketplaces/platforms (tindieGroupTalentClarity) – with a relatively equal split across all three areas
  • Investments were roughly 50% B2C, 50% B2B – this was the highest share for B2B investments since I started (angel) investing 6 years ago
  • 2/3 of 2012 investments were seed deals and 1/3 were Series A
  • Version One companies were a 50/50 split between the U.S. and Canada… with startups in the Bay area, Edmonton, Los Angeles, Montreal, New York, Portland, Seattle, Toronto, and Vancouver.


Announcing Version One’s final close

In addition to wrapping up 2012, I’m happy to announce the final close of the Version One Ventures fund with $19 million in committed capital. Our original target was $10M, so I’m extremely grateful at the confidence our investors placed in the fund. In addition, I’m particularly excited that this final close includes an institutional investor, the Business Development Bank of Canada (BDC) – their announcement can be found here.

Moving forward, we’re continuing our focus on e-commerce, SaaS, and marketplace opportunities in the Seed or Series A stages. It is still early times for the web and we’re excited to work with great entrepreneurs looking to change their industry or the world.

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4 ways to compete in Amazon’s shadow

If it has a UPC code, Amazon will beat you.  Thanks to a bigger inventory, low prices, convenient return policy, trusty user reviews, and services like Amazon Prime, Amazon is the world’s largest retailer and doesn’t seem to be moving from that position any time soon.

But even in the shadow of Amazon, there are several opportunities for entrepreneurs to make a dent in e-commerce. Here are four ways:

1. Unique product line:

As I recently wrote in TechCrunch, a new generation of web-only brands are bringing their products directly to consumers without the bloat of the traditional retail value chain. Together vertically integrated retailers like Warby ParkerIndochinoStella DotChloe & IsabelFrank & OakEverlaneBonobos and J Hilburn will generate over a billion dollars in revenue in 2012.

By creating their own unique brand and offering products that can’t be found elsewhere, these retailers don’t have to worry about competing head-to-head with Amazon and Amazon prices.

2. Curated shopping experiences:

Like Google, Amazon offers an efficient platform for searching for a specific item. In a GigaOM article, Michael Schreck described Amazon’s platform: “One click and you’re out. Amazon’s anti-shopping model reflects the characteristics of the very people that built it — engineers — who quite frankly are not your typical power shoppers.”

With the rise of the iPad and retina display, there’s a real opportunity for e-commerce companies to build a visually engaging, glossy digital shopping experience that is more like window shopping than typing a product into a search engine and getting a bunch of product results back. Curated shopping experiences like encourage consumers to sit back, browse and discover entirely new items – the very things they can’t do on Amazon.

3. “Second season” discounts:

Flash sale sites have become one of the fastest growing segments in e-commerce. Companies like GiltZulily, and One Kings Lane offer steep discounts on products for a limited time, promoting them via urgent emails. Most of the products failed to sell in brick-and-mortar stores the previous season. For shoppers, these sites feel more like a designer’s sample sale – they offer an insider’s price on designer goods if you’re there at the right time and are ready to act fast.

This is a rather mature segment with many verticals already being taken by strong players that are generating several hundreds of millions of dollars in sales. With access to unique inventory being the key success factor, newcomers in this space might face a tough time against those incumbents and their strong purchasing relationships with brands.

4. Marketplaces

Online marketplaces connect buyers and sellers of often unique products, filling a niche that speaks to a particular audience. For example, Etsy offers a channel for aspiring designers and crafters to get distribution. Threadflip offers a more personal version of eBay focused on buying and selling secondhand designer fashion goods. And tindie connects buyers and sellers of DIY electronics. While the chicken-and-egg problem of supply and demand makes marketplaces hard to build, they can scale very quickly once a network effect starts to develop. Due to network effects, marketplaces also create important barriers to entry.

In summary: while Amazon won’t be unseated any time soon and you can’t expect to compete on price, there are billion dollar opportunities waiting in discovery, curation, marketplaces, and vertical integration.

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