The Emergence of “Pre-Seed” Capital

Notation Capital, founded by former Betaworks folks, is a new pre-seed investment fund launched a couple of months ago. 

Notation Capital is attempting to institutionalize the round of funding that’s usually done by “Friends and Family”. With just an idea and a co-founder, one could actually raise up to $500K in exchange for 5% to 10% of equity.

Really, pre-seed investing isn’t anything new. A few years ago, these rounds were simply known as seed or angel rounds, lead by early stage investors like SV Angel, Lerer Ventures, or Thrive Capital. Startup accelerator programs like TechStars and Y Combinator also use a similar model.

The thesis here is clear – firms are entering both from below and above the traditional VC-backed period of a startup lifecycle in hopes of capturing more of the returns generated by high growth companies. This is why we continue to see more large and institutionalized seed rounds (by pre-seed capital funds), as well as more large and highly-valued growth rounds (by public and/or PE funds). 

From a risk/reward perspective, I think funds with “bookend” strategies (either preceding or following the traditional VC funds) likely have lower return thresholds. What would be interesting is to see a partnership between very early and pre-IPO strategies – if one could be used to identify the winners and the other used for putting more capital behind those winners. 

Recruiting for VC

This post was originally distributed via John Gannon’s VC Jobs mailing list. Edited and re-posted here because I regularly get inbounds on this topic.

I recruited for VC jobs in the spring of 2012 during my first year at Barclays, where I was working as an investment banker.

My recruiting process was fairly straightforward. I met with some headhunters (Glocap and Amity) who specialized in placing Investment Banking analysts as associates in VC firms. I utilized the VC Careers mailing list as well as Christina Cacioppo’s list as resources. I also dropped my resume at several places that posted an opening (e.g. online job boards or targeted mailing lists).

I definitely bombed a couple of interviews early in my process, but the journey definitely taught me how to present myself as a more viable candidate. So think of your VC job hunt a little bit like SAT prep – the only way to get better at it is to do more of it.

On that note, here are the key lessons that I learned during my search:

  1. The saying goes that you have a better shot of becoming a professional athlete than a VC. I haven’t done the math, but the bottom line is that VC openings are much more limited than the number of folks who wants to get into the industry. At the beginning of your process, make a list of the VC firms you’d prefer to work for – either from a stage, geography, or focus perspective. However, at some point your recruitment process will turn into a numbers game. I’d like to say that you should be strategic in which VC firms to approach, but the reality is that it’s a buyer’s market.
  2. Part of being a VC is having the luxury for being paid to think. My interviews were always casual and conversational, because the partner is ultimately trying to understand the way I thought. There are only two ways to hone on-the-fly critical thinking skills: read a lot and blog even more. Be prepared to present some of your theses with the reasoning to back them up.
  3. They say VC is also a people’s business. As much as it is about the analysis and decision-making, VC is also about who you know and who knows you. In an interview context, this is why networking is so important – don’t be afraid to name drop some folks that you have met and maintained relationships with, especially if they are relevant fellow VC or entrepreneur. While in banking, I spent many of my free evenings and weekends attending tech events in NYC. With the proliferation of blogs and tweets, it’s only become easier to access tech investors and entrepreneurs, even if you’re chained to your day job.
  4. Firms seeking candidates with finance backgrounds are typically later-stage VC’s. Those firms prefer hiring folks out of an Investment Banking or Management Consulting program. One recent implication is that competition with PE firms for these same candidates has driven later stage VC firms to recruit earlier and earlier each year – some, like IVP, even hiring a year in advance.
  5. It’s a crapshoot. Some firms liked me enough to have me participate in multiple rounds of interviews, while other firms ignored my resume drop and cover letter. Each VC firm may be looking for something different – either in terms of experience, education, or cultural fit. Don’t take it personally and keep your chin up.

Robotics: the inevitable future

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Seen by its makers “more R2D2 than RoboCop,” the autonomous policing robot Knightscope K5 promises to patrol geo-fenced beats in hopes of reducing crime by 50 percent.

As a late-stage investor, I’m often waiting on the edge of my seat for technologies to mature to a point when IVP would typically get involved. For me, robotics is one of those exciting areas where I have to unfortunately sit on the sidelines, for now. 

Some quick thoughts on how robotics will develop over the next couple of years:

  • Forget the consumer angle (see: the Jetsons), as with other next-gen devices such as Google Glass, robotics will first find their plateau of productivity in the enterprise. (see: AMZN / Kiva Systems)
  • The future is friendly – robots should be made to look as innocuous as possible. (see: Eve from Wall-E)
  • Robots will not only replace human functions, but enhance them too. In the example of Knightscope, the robot can analyze data, such as hundreds of license plates, in a way much faster than a human can. In other words, go for a revenue-generating sales pitch, not just a cost-saving one. 

I have to admit that my understanding of robotics is still elementary Any suggested readings for me?

(PS. Speaking of Wall-E, this cruise ship is just missing those personal hovercrafts…)

Robotics: the inevitable future

Fundraising Acceleration as a Flawed Paradigm

For the last 12 to 18 months, the private technology market has seen sky high valuations and a significant disconnect from the public markets. Recently, much talked-about startup Slack raised $120M at a $1.12B valuation with just $1M in monthly revenue. My friend, Danny Crichton, wrote a really insightful piece on TechCrunch regarding this new trend of “fundraising acceleration”.

Crichton outlines the factors that have created such a fundraising strategy and also carefully points out the disadvantages of raising too much at too high a price. Namely, he highlights the increasing bifurcation of the have’s and have-not’s (high and low-growth companies, respectively), as well as consequences with equity compensation for employees.

Here are some pitfalls I see with this kind of investment strategy:

  • High risk of a down round: Macro conditions are nearly impossible to predict. Unless the mega round is meant to fully fund a company from one bull cycle to another, it’s likely that the next funding round will be a difficult one.
  • Capital inefficiency: This type of fundraising strategy is also counter-intuitive to the lean startup philosophy. Raising such a large amount of capital creates negative incentives to be capital efficient, and in the hands of an un-experienced team, can lead to higher burn rates.
  • Increased execution pressure: With a valuation so far beyond fundamentals, management teams will and should feel an increased pressure to perform. It’s no longer enough strive to deliver on a vision you’ve sold because you’ve already committed to deliver it. Traditional “Plan B” options, such as acqui-hires, will become harder to sell to the board.
  • Diminishing returns: The reason that market leaders are often rewarded by an order of magnitude is that idea that in a networked world, winners take most (if not all). With funding acceleration, VC’s are not only increasing the risk of betting on the right horse, but also driving down their own gains. As the adage goes, capital flows into an asset class until returns revert to the mean. When that happens for the VC asset class, it’ll be a painful day for those holding such over-valued assets in their portfolios.

Crichton also writes, 

The person who most popularized this notion of investing was Marc Andreessen (who ironically also happens to be one of the earlier investors in Slack), as well as Peter Thiel, whose experience with Facebook’s growth encouraged his investment thesis for Founders Fund.

While I’m a big fan of both, we should also consider the fact that neither of these two investors have long enough tenures as VC’s to have experienced a downturn in the markets, and more specifically, a downturn within the technology sector.

First Thoughts on Meeker’s Internet Trends

I’ll always remember how excited I was every time Mary Meeker’s report came out – especially when I was still a banker at Barclays. It not only contained tons of useful market data (a gold mine for analysts), but it also marked the steady passage of time. You could always count on a new Meeker presentation every 6 months, or so, and the topics she discussed often had a nice continuity. Today, these reports are a pleasant reminder of how lucky and excited I am to work with companies that will shape our future.

Some of my initials thoughts:

  • Slide 8: Very surprising that PC users are still lagging global TV users. This data shows that technology platform shifts can leapfrog each other. The “next big thing” (in this case, PC’s) may not be as big as the “next next big thing” (mobile phones). 
  • Slide 9: It’s no longer enough to be the “largest in the U.S.” – companies need to think globally. It’s disappointing that those of us in the Valley still tend of think of tech as being very US-centric. For example, most people can name tons of early-stage startups in SF, but haven’t heard of companies like Alibaba or Baidu. Meeker goes long on China later in the presentation (slides 127 – 136).
  • Slide 10: If it wasn’t clear enough already, platform wars are over and Android is a clear leader (though not without its problems).
  • Slide 15: Meeker has underlined the disconnect between “time spent” and “ad spent” for years now. The hold that print advertising has comes from the strength of traditional advertiser/publisher relationships and the traditional budget split between branding and performance campaigns. 
  • Slide 55: Meeker positions the “Internet Trifecta” as getting a critical mass of content, community, and commerce. I believe these criteria mainly fit e-commerce companies. Other consumer web startups, such as Dropbox or Uber, have focused instead on delivering unparalleled value to the user, without the 3 C’s.
  • Slide 161: This slide is probably the most valuable to founders & entrepreneurs. Particularly this piece of advice: great companies grow revenue, make profits, and invest for the future. 

I’m an investor, and since most of Meeker’s analysis is backward looking (historical trends and “re-imagined” use cases), I try synthesize some of her forward-looking takeaways. Most prominently, Meeker’s presentation sheds light on three major markets: Online Video, Healthcare, and Education. Some of our most recent IVP investments tie directly to these themes, such as ZEFR and General Assembly, and I’m excited to discover other great startups in these verticals.

Hardware as Software and the Business Model Revolution

I wrote a post this week and Alex published it as a guest post on his blog. Go check it out!

alexstechthoughts:

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Jordan Kong is an Associate at Institutional Venture Partners, a late-stage venture fund in Menlo Park. She previously studied at Columbia University, interned at several NYC tech startups, and did a two-year stint on Wall Street. Jordan blogs regularly, tweets frequently, and takes photos

Hardware as Software and the Business Model Revolution

Red Herring Metrics

With all that’s been written about the Series A crunch, it’s no secret that series A investing has become more difficult. I would argue that it’s become more difficult because the definition of traction (a key decision factor in Series A investing) has changed dramatically over the past decade. In short, industry conditions have made it much harder to determine if a product is truly getting traction, or will only be a flash in the pan.

Increased Eyeballs: There are countless charts which show how new applications are acquiring millions of users in record time. It could be that today’s consumer startups have a high value prop and a better user acquisition strategy. But the underlying driver is that today’s populations are more plugged-in than ever, creating an easier climate to acquire those millions of users. Charts comparing such user acquisition rates are not apples-to-apples are don’t take into account macro conditions.

Ease of adoption: With increasingly better mobile infrastructure, downloading a new app has become effortless. With several services offering one-click sign-up (Facebook, Twitter, Google+ integration), user registration has become more frictionless as well. This is a double-edge sword – it’s never been easier to both acquire and lose users.

Duplicated Data: In the wake of social network proliferation, personal data is no longer a proprietary asset. A picture taken on mobile can be simultaneously sent/posted/shared to dozens of apps (Twitter, FB / Instagram, Tumblr, to name a few). For all pitch decks showing user data metrics, it’s helpful to keep in mind the Venn Diagram intersection of this user data with existing applications and platforms. 

Network Effects as the New Norm: Social as a necessary feature has allowed most app to instantly on-board your entire network when you sign up. Even if you don’t like to use Facebook or Twitter sign-up, most mobile apps will also have access to your phone address book, making it easier to find friends and to invite other contacts to the service.

Which metrics should matter, then?

  1. Relative traffic: Measured on a relatively basis and keeping in mind that Facebook has 150mm MAU and Youtube gets 1bn unique visits per month.
  2. Engagement: Today’s consumer startups are not only competing for wallet-share, but for attention-share as well. 
  3. Real business moats: the more things change, the more they stay the same.