Month: December 2015

Follow me @samirkaji for my random, sometimes relevant musings about venture capital. I’m a big fan of the question and answer site Quora and think it’s an especially great resource for entrepreneurs and investors. Earlier this year, I ran across this great question posted by an anonymous user: “What are the best-kept secrets about venture capital? If you have some free time, I’d encourage you to check out all of the responses, as several are extremely insightful. I’m reposting my (slightly expanded) answer below. · Fewer than 20% of venture capital funds provide the level of risk and duration adjusted returns that meet Limited Partner expectations (2.5X+ cash on cash return). · Even fewer individual venture capital partners (<10%) meet Limited Partner expectations. · However, the top 1% of venture capital funds can be transformational for the investors that are lucky enough to invest in them — Think Accel IX (Facebook) or Lowercase Capital’s first fund (Uber & Twitter). · It’s a relatively tiny industry compared to other asset classes, with only about $30B going to venture firms per year. Private Equity Buyout firms by comparison raise nearly 10X as much. · As counter-intuitive as it may seem, bull markets bring a whole host of unique challenges to VC’s. Apart from balancing fund deployment pressures while maintaining valuation discipline, capital becomes a marginally valued commodity by the best companies and entrepreneurs. No longer can “value-add” simply be something abstract, but needs to be definitive and authentic. · Fundraising sucks for them VC’s too, perhaps even more. With the exception of 50 or so firms, fundraising tends to be a long, frustrating campaign that can span 12 months or longer. · It’s not a sure path to untold riches. In fact, the industry is littered with tenured venture partners who have yet to receive a carry check (carry is the VC’s share of a fund profits). · Shiny objects matter to VC’s, too. Regardless of valuation, it’s it’s great PR for a firm to have name brand companies like Uber or AirBnB in their portfolios. · It’s a really, really long term commitment. Most funds these days, while structured as 10-year vehicles, end up surviving 14+ years before the last company is even liquidated. During that time, VC’s are on the hook to constantly update LP’s, provide financial reporting, and do all the not- so- fun stuff that comes with running a fund. · Economics are rarely shared equally at firms. 1st generation partners usually enjoy the bulk of carry and firm governance (a primary reason generational planning has been such an issue within venture capital). Benchmark Capital, which employs an equal carry structure for all partners...

Over the years I’ve become a wine enthusiast of sorts. Although I’m nowhere near a connoisseur, I genuinely love sampling new wines whenever given the opportunity. However, more often than not I’m presented with encyclopedia sized wine catalogues when dining out. Like most things in life, options are great but only up to a certain juncture. Even well educated wine drinkers (not myself) can get tripped up when there are too many choices. For entrepreneurs, raising a seed round from VC’s in today’s market can feel similarly confusing. Along with the slew of larger traditional venture funds that dabble in seed stage investing, there are now nearly 300 “Micro-VC” firms dedicated to investing at the seed stage. The chart below provides a trend line of the approximate number of Micro-VC firms in the market. Institutional Seed Stage funds by year (“Micro-VC”) June 2015 – based off my tracking of Micro-VC funds. As is the case when choosing a type of wine, choosing the right venture partners is a highly personal choice, and requires a sophisticated understanding of your company’s needs to determine optimal investor fit. Of course, the downside of picking an incompatible funding partner is exponentially higher than choosing the wrong wine (although I’m sure that statement will upset a few sommeliers out there). To decode some of this confusion, there are some basic items that entrepreneurs should consider when evaluating potential institutional seed stage investors. 1/ Can you lead my round? Frequently, I see entrepreneurs spending countless weeks courting prospective investors only to discover that those investors will not participate until a lead investor comes in. A lead investor is any investor that anchors a round of capital, typically by setting terms of a priced round, or in the case of a convertible note, writing the largest check. For smaller investors, lead investors play the important role of representing the investor base as it relates to company building and tracking activities. While it’s rational to assume that every venture firm regardless of size can lead a round, it’s no longer always the case, particularly within the Micro-VC market. Through an analysis of roughly 250 institutional seed funds that I tracked through 6/30/15, nearly ~48% had fund sizes that were $25MM or under (many of which were sub-$15MM). Many of these firms don’t have the ability to truly lead rounds, and instead rely on a syndicate partner to act as lead. While these smaller firms can be great partners, it’s important to recognize that closing them will often mean securing a lead investor first. Also note that institutional lead investors can help galvanize a round by using their network to secure a large...