Month: November 2015

(repost from innovation.firstrepublic.com) From San Francisco to New York, more than 250 micro venture capital firms now actively invest in early stage startup companies. Micro VC firms, which typically raise funds under $100 million, represent an extremely valuable option for entrepreneurs seeking the strategic financing and expertise to help grow their businesses. To better understand the micro VC market, and to identify some best practices for new managers seeking to raise their first fund, Kathryn Gould, Co-Founder and former General Partner at Foundation Capital, and Ashmeet Sidana, Founder and Managing Partner of Engineering Capital, offered a fresh look at the space and what it means to launch a new micro VC firm in today’s market. When it comes to the micro VC sector, how did we get here and how did we come to have so many? Kathryn Gould: The increase in number of funds can be traced back to the 2008 financial crisis, the subsequent increase in liquidity and complete lack of yield from the global financial system. During this time, Silicon Valley, and more broadly, startups, were perceived as one of the few areas of growth. Money rushed in, leading to an unsustainable increase in the number of funds. Another important enabler is that the cost of starting a company dropped dramatically due to the success of lean startup methodologies… though the cost of scaling a company has arguably increased. Additionally, high-quality limited partners became more comfortable backing a single general partner, recognizing the benefits of not having a large partnership-overhead. Finally, several established partnerships went through large rounds of fundraising making it difficult for them to commit to and help entrepreneurs at the truly formative stage. All these trends created a gap that has been filled by a new class of professional, but small, partnerships — the micro VC. Fundraising can be very challenging for first timers; what advice would you give general partners on formulating a fundraising strategy? Ashmeet Sidana (@ashmeetsidana): Identify an experienced mentor. I was fortunate to have Kathryn as a mentor helping me start Engineering Capital. Kathryn is an experienced venture capitalist. She is one of the rare people who has helped start multiple venture firms, which gives her a unique perspective on the landscape. Whoever you choose as your mentor, be sure that they have well-rounded experience in the field. Gould: Identify your differentiation from all the existing funds you will be competing with, and then make a compelling case for the value you will add. [The idea is that] the best entrepreneurs will choose you over established brands. But without a crisp differentiation and compelling value-add, it is too late to start a first-time fund in Silicon Valley. What would you...

Follow me @samirkaji for my always random, sometimes relevant thoughts on the world of venture capital and technology. Building a great company requires many different facets. Most importantly, it requires a talented team with great conviction to build toward an incredible vision. Of course, building a company requires capital. Capital can come from many areas ranging from angels, friends and family, cash flow from operations (yes, it does happen on occasion), and from VC’s. While many entrepreneurs seem to have a love/hate relationship with VC’s, most resign themselves to the fact that they will have to jump on the venture treadmill at some point. A logical conclusion given that almost every major technology company founded over the past couple of decades has been venture backed. With that said, I frequently meet entrepreneurs that refer to the VC community with some level of derision. The complaints range from a view that VC’s don’t seem to take enough risk at the earliest stages to concerns around economic and strategic misalignment. While many of the anxieties I hear are certainly valid, a truly symbiotic entrepreneur-VC relationship can serve as an incredible accelerant for a business. For this to occur however, it’s important that entrepreneurs understand the VC business as much as VC’s understand theirs. Doing so will help determine both whether VC is an appropriate fit for your business, but will also provide the best opportunity of building a synergistic relationship with your investor. First, the truth of the matter is that very few startups are truly venture fundable. That’s not meant as an indictment. Many companies that never go on to raise venture money provide wildly successful educational and financial outcomes for their founders. They simply aren’t conducive to venture capital funding. To illustrate why, let’s dig a little deeper into venture math. Through advances in areas like cloud computing/hosting, companies today in 2015 can get off the ground at 1/100th of what it would have taken back in 1999. These cost efficiencies have created a world where ~10,000-20,000 companiesare formed every single year. Of these: -Approximately 1000 get venture funding -Approximately 50-100 encounter decent exits ($50MM+) -Perhaps 5-10 have bellwether exits (>$500MM). These 5-10 drive 90%+ of the returns within venture. Looking at this in another way, the power law of returns evidenced above makes the venture capital game really, really difficult. Every year, only about 10%-20% of funds provide risk-adjusted returns consistent with Limited Partner expectations. To take this to a more granular level, let’s do an exercise to examine a hypothetical $25MM Micro-VC fund with a fairly common expected return distribution model: *$2MM for fund admin costs, assuming no recycling The above example would...