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. 

Is 2015 The Year Legal Weed Changes The Future Of The American Economy?

I wrote an article on VC investing in the marijuana industry… a fun topic given how big and common weed is in the valley. Also an interesting topic to consider for all investors, in light of Neumann’s most recent blog post, where he claims, 

the only thing VCs can control that will improve their outcomes is having enough guts to bet on markets that don’t yet exist. Everything else is noise.

Is 2015 The Year Legal Weed Changes The Future Of The American Economy?

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.

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.

What the @Facebook @Oculus acquisition tells me about the future

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Both the Internet and my own circle of friends have debated this issue to death (so price. much social.) And as Fred Wilson puts it, 

It isn’t clear if the next thing is virtual reality, the internet of things, drones, machine learning, or something else. Larry doesn’t know. Zuck doesn’t know. I don’t know. But the race is on to figure it out. 

What we can expect, however, is increased VC interest in companies that could potentially bring us a new future. This is true for companies who are both competitive and complimentary to products by Nest or Oculus. Competitive companies stand to gain from these acquisitions because VC’s know that it’s rarely a one-horse race. Complimentary companies stand to gain even more as many tech incumbents have already signaled that this is where the future is going. 

I’m bullish on VR, and FB/Oculus’ upcoming challenges will prove whether the Oculus Rift is more of a Segway or an iPhone. The best step that the iPhone took was to create an ecosystem that was both open and controlled – any third party could build on top of the iPhone, but the quality of the apps were held to a high bar.

There are startups that are already building technologies that would be a great fit for the Oculus Rift. Thalmic Labs, based in Canada, has created the Myo armband for accurate and granular gesture control. Nymi and InteraXon are two bio-sensing startups – they measure heartbeat and brain activity, respectively, to control a connected device. And the quantified fitness space continues to grow with startups like Push and Hexoskin.

As I look at the new crop of hardware startups that will help create the next platform, it’s easy to see two things:

  1. As Chris Dixon said, the next big thing will start out looking like a toy
  2. Many of these next-generation hardware startups are based in Canada, where cost of living is cheaper, recruiting is less competitive, and the government has been supportive of startups by offering R&D tax incentives and offering a start-up visa

From where I stand, the future is both fun (toy!) and friendly (Canada!). I, for one, cannot wait. 

Quick Thoughts on @YCombinator’s First #FemaleFounders Conference

YC’s FFC was one of the more enjoyable conferences I’ve been to in a while. The attendees were great, the format was brisk, and the content shared was by and large very helpful. 

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At one point, there was a panel of founders discussing the topic of fundraising. Two things hit me:

  • It was weird. I have never seen an all-female panel before, especially not at any previous tech conferences. The fact that seeing an all-female panel seemed strange surprised me in and of itself – even I, as a female technologist of sorts, had become used to and complacent of the male-dominated nature of my field.
  • It was enlightening. As a VC, I rarely hear such candid tales of fundraising from the entrepreneur’s point of view. Since I learned so much from this short session, I would definitely encourage any entrepreneur, aspiring or otherwise, to sit in on a couple VC-focused events. After all, EdTech vendors often attend Educator conferences and likewise, many industry conferences include both vendors & customers as attendees. In a way, VC’s and entrepreneurs are simultaneously each other’s customers – so why not get to know your customer better?
  • It was inspiring. All of the female founders speaking at the conference were extremely humble – they had a “if I could do it, so could you” attitude, and many went at length to highlight their failures and inadequacies. It was a great reminder that I should probably be building, too.

With PG in the spotlight, many people forget that Jessica Livingston was also a co-founder. She shared her story her responsibilities as the sole nontechnical co-founder (delivering AC units to YC companies!) and juggling being a founder and a mom. She also highlighted that YC has been trying to fund more female founders over the years. 

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