Posts Tagged: venture capital
Look across virtually any industry and you’ll see great examples where traditional spaces are being disrupted by software, access to data, and massive online communities. The net effect is powerful: it empowers all of us (no matter who we are or where we are) to learn more quickly, make better decisions, and operate more efficiently.
Thus, it should come as no surprise that we are now seeing Venture Capital being disrupted by these forces as well.
In the past (aka 1990’s), very little content on start-ups and VCs was publicly available. The fundraising process was closed and privileged: it all boiled down to who you knew offline. In his post The Disruption of Venture Capital, Albert Wenger described VC as “the club you had to be invited into.”
Today, the boom of information (i.e. start-up databases/networks like CrunchBase and AngelList) has led to unparalleled access to investment capital as more seed funds, angels, and syndicates emerge on the scene. People who are not traditionally in VC can now invest in startups with a higher comfort level, because CrunchBase and AngelList have made data on thousands of start-ups publicly available. In just a few clicks, you can find everything from the company’s tagline to information on founders and investors, number of employees, funding rounds, etc.
However, while we may be shifting from a closed system to a more transparent (and hopefully merit-based) environment, there’s a lot of noise being created along the way. Business data on start-ups, VCs, PE, financial markets, sales and marketing is being created at an alarming rate. Yet, most of this data is fragmented and inconsistent – making it difficult for decision-makers to leverage the information.
So, how can we use all this data to make better decisions? Or more specifically, how can we as investors better identify and find those start-ups that are primed for success?
Enter Mattermark: where “Big Data Meets Venture Capital”
Mattermark is a web-based platform that helps VCs weed through the vast amounts of data to identify potential investment opportunities and track existing start-ups and private companies. The product collects, cleans, and curates data from news sites, SEC filings, Twitter, LinkedIn, Facebook, AngelList, CrunchBase, and more. It offers custom reports, real-time updates, specific filtering, and easy organization of start-ups based on stage, vertical, geography, and Mattermark score (a proprietary index that measures momentum).
Mattermark was launched in the Fall 2013 and is led by Danielle Morrill, Kevin Morrill, and Andy Sparks. The team are alumni of Y Combinator S12 as well as Batch 5 of 500 Startups in 2012. You can read about the company’s background on VentureBeat and TechCrunch.
Why we’re excited
The Version One portfolio is full of examples where software/online platforms are disrupting specific verticals – from Top Hat (education) to Upverter (hardware development), Figure 1 (healthcare), Jobber (field service), and Clio (legal). But, Mattermark is disrupting our own industry and giving us the tools to do our job more efficiently.
For starters, Mattermark allows us to be more proactive. Like with most VCs, our inbound leads come from our network. While we greatly appreciate these introductions from fellow VCs and entrepreneurs (who are great curators in their own right), inbound leads are inherently reactive. We’re relying on others to send what they think are the right opportunities for us.
But with Mattermark, we can now leverage the vast amounts of publicly available data to identify the rising stars and compare them to other companies in their vertical. Mattermark is never going to replace our own network, relationships, and gut, but it does make us much more efficient in sourcing and researching opportunities. We’re now able to generate more outbound leads.
Danielle Morrill has said that Mattermark’s goal is to create a company that is the equivalent of Bloomberg for start-ups and Venture Capital – providing investors with the tools to discover, research, and track start-ups. We’re excited for the possibilities.
As someone who is still relatively early in his investing career, I often think about what qualities set successful investors apart from the rest. Good investing doesn’t just happen. And while luck may help at times, it’s not the answer. Here are few key ingredients that I consider important for being a great investor:
Live in the future
Paul Graham advised start-ups to “Live in the future, then build what’s missing.” Once you’re living at the leading edge of a rapidly changing field, you’ll see things that are missing…challenges or frustrations that need to be solved. And, once these problems are solved, they’ll seem very obvious in retrospect. This same advice applies to investors as well. You can only create above-average returns if you invest in companies that are ahead of the mainstream.
Have a well-defined investment thesis
Fred Wilson once wrote, “So many folks in the venture capital business are sheep that just want to follow the herd. They are momentum investors purchasing highly illiquid investments. That is a recipe for disaster.”
In order to not follow the herd, you need a strong set of convictions to serve as the foundation for making bets, and then following through on them. For Version One, I’ve created a map of what particular areas we should focus on and where they’re going over the next few years. Then, I can evaluate each potential investment within the context of this map/thesis.
Stick with it
Not every investment is going to be wildly successful right away and one of the hardest things to do in the venture capital is hence to stick with a struggling investment. However, if you’re going to be successful as an investor, you need to realize that once you are in, you’re in. There’s no turning back, or ignoring a flailing start-up until it just goes away. Of course, it’s much easier to stick with your guns, if you’ve made the initial investment based on your own core principles/investment thesis, rather than simply reacting to market trends and current momentum (point three).
Be both a cheerleader and a critic
There will be times when your portfolio teams need an enthusiastic backer and a quick pep talk. Then, there are other times when honest, sometimes even harsh, feedback is necessary. I think an investor needs to be a start-up’s biggest cheerleader and their most honest critic. You can’t just be one or the other: praise without honesty are just empty words. Yet, a constant focus on the negative won’t generate the results you want either.
Remember who runs the company
Successful investors are usually active investors; they show up at board meetings, respond to emails and phone calls from the founders, and constantly think about the company and the ways they can help. However, the exact level of participation is a delicate balance; an investor should never cross the boundary of getting too involved. At the end of the day, the entrepreneurs run the company; the investor is an active bystander. Founders make the ultimate decisions; investors can only advise.
Those are the five essential ingredients that I’ve been thinking about lately. If you have other thoughts, share them in the comments below…
I often see two entrepreneurs executing on similar opportunities, but with two very different capital efficiencies. First, there’s the aggressive one who spends money very quickly, building a large team, buying early growth through aggressive marketing and sales, and hoping for a large upround in the next financing round. Then, there’s the bootstrapping entrepreneur who hires carefully (sometimes too little, too late), trying to get as much runway with the current money as possible and build a “real” business.
Finding the right balance between investing in growth and focusing on capital efficiency is one of the toughest challenges for entrepreneurs and early-stage start-ups. It can be particularly tricky as investors are usually looking for growth and evaluating start-ups as defined by growth.
Here are a few observations and pieces of advice to help you navigate which spending model is best for your start-up:
1. Don’t invest in marketing and sales until you have found product-market fit:
Marc Andreesen once categorized start-ups as before product-market fit (BPMF) and after product-market fit (APMF). When you are BPMF, you should be doing everything you can to get to product-market fit…whether that’s changing out your people, tweaking the product, moving to a different market. However, there’s no point in spending on marketing and sales at this point; until you’ve found the right product for your market, you’d simply be wasting your money.
2. Revisit product-market fit from time to time:
Don’t assume that what worked in the early days will continue to work for years to come. External changes in the market can impact your product-market fit, as may your own growth path. For example, as a SaaS company scales and targets larger enterprise customers, its initial product-market fit may no longer be as strong.
3. Evaluate your market: is it winner-takes-it-all?
If you’re targeting a winner-takes-it-all (or almost all) market, then focusing on saving money makes no sense. You’d be sacrificing market leadership. Think about it. Nobody remembers Ryze, or Spoke as early LinkedIn competitors. But if you’re operating in e-commerce or other non winner-takes-it-all markets, then you don’t have to be overly aggressive in the early stages. In this case, you can take your time to fine-tune your model before aggressively scaling up.
4. Get your metrics under control:
Putting the “pedal to the metal” makes the most sense if you understand your LTV (lifetime value) per customer and CAC (customer acquisition costs). As you scale, you should also have early warning systems in place to see if your new customers and acquisition channels are performing at least as well as the previous ones (weekly LTV/CAC cohorts are the best measure for this).
As an investor, nothing is more impressive than meeting an entrepreneur that has built a great business in a short amount of time and with very little money. Being frugal and knowing how to spend money is one of the most important entrepreneurial traits – as long as it doesn’t come at the expense of growth. Jeff Bezos/Amazon is probably the best example where the right balance of frugality and growth is engrained in their DNA.
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…
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.
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.
- How the Internet changed the venture capital landscape: Albert Wenger (business.financialpost.com)
- Union Square Ventures is back in Berlin: $7m Series B for THE Football App (venturevillage.eu)