Blog Archives

Celebrity investors

Celebrity investors

Follow me @samirkaji for my frequent, and sometimes relevant insights into the world of VC and tech. Every week, our team receives at least 15–20 emails from entrepreneurs that raising a seed or Series A round for their companies. While some simply reach out to solicit general advice, the vast majority are mainly interested in getting introduced to a specified list of investors. When an entrepreneur has put in the appropriate work to qualify fit (and where we agree), we’ll happily make the connection assuming that the investor opts-in to the introduction. First, broadly speaking, I strongly encourage entrepreneurs diligence potential lead investors as strictly as potential investors conduct diligence on them. A great lead investor-entrepreneur relationship is comparable to a healthy marriage, where both sides challenge each other to become better, are able to engage in blunt conversations borne out of trust, and can be appropriately supportive through both thick and thin. And while I doubt anyone would debate the importance of compatibility as it relates to the investor and CEO relationship, I’ve recently observed a trend where too many entrepreneurs have relaxed investor diligence discipline for “celebrity” investors. A couple of brief editorial comments first: – When I use the term celebrity investor, I’m not referring to mainstream celebrities such as Ashton Kutcher or Carmelo Anthony that happen to actively invest in technology start-ups (frankly, their brand equity value alone usually justifies the modest check sizes they put in). – I’m also not referring to investors that have become industry celebrities as a function of extremely long and successful track records (i.e. Bill Gurley, Mike Moritz, John Doerr, Vinod Khosla, Peter Thiel, Fred Wilson). Instead, I’m referring to investors that have become influential personas in industry circles largely as a function of personality, social media presence, or through some other measure unrelated solely to their talent as an investor and company builder. When I started within the industry 16 years ago, there were only a handful of investors that had built notable personal brands. Times have certainly changed. The ubiquitous media coverage of technology coupled with the enormity and depth of social media reach has granted individual investors a platform of quickly creating personal brands with astonishing reach. As an example, let’s examine the reach and activity the following venture investors have: Twitter followers by investor The 6 VC’s above have nearly 700,000 followers (mainly industry types), and have sent nearly 250,000 Tweets! Add in active presences on blogs and speaking engagements, and it’s no wonder they have become household names in entrepreneurial circles. What is fascinating is that everyone in the group above has been an institutional investor for less time than a...

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The World of Institutional Seed Financing.

I’ve written fairly extensively about the evolution of the Micro-VC (or institutional seed) market over the last year – See previous posts for more detail. I recently gave a short presentation to a group to discuss the current state of the market along with some short-medium term predictions. Attached here is the, admittedly rudimentary, deck I used. Update on Micro-VC from Samir Kaji  ...

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How to “Cold Call” Investors

This is part 2 of 2. Part 1 is here. Follow me @samirkaji for my always random, sometimes relevant thoughts on the world of venture investing and startups. In my last post, I described how to effectively ask for a warm introduction to investors through mutual contacts. Of course, the premise of the article was centered around the supposition that most investors today still primarily (or solely) engage only with companies that are referred in by a trustedsource. However, as many of my readers accurately pointed out, most entrepreneurs simply don’t have robust enough networks that they can effectively leverage for warm referrals to targeted investors. This rings even truer for entrepreneurs migrating from areas outside of Silicon Valley, LA, or New York. While there are fairly rational reasons why investors are biased toward referred companies over cold inbounds, we know that great companies can come from anywhere. Despite that fact, many investors have bluntly told me that they doubt they will invest in a company that comes in from outside of their network. I’d posit that this legacy way thinking has sub optimized venture returns by overvaluing social proof and creating unnecessary mental biases when evaluating out of network deals. I’m going to cover this in a future post in much more detail, as I think it’s an important topic to deconstruct. Further supporting the point, take note of First Round’s analysis of their portfolio, which evidenced that non-referred companies outperformed referred companies by a substantial margin. Courtesy: First Round Capital Review. Again, I’ll leave the behavioral psychology discussion for another day. Instead, I’ll focus here on how to most effectively “cold call” an investor to assure a higher probability of engagement. 1/ Focus The spray and pray approach of messaging investors is as effective as those emails that populate your Gmail promotions folder. As a mildly active angel investor with an AngelList profile, I get 40–50 non-solicited emails a month from entrepreneurs fundraising. Unfortunately, the majority of the emails come off as spammy with very few including “engagement hooks”. Looking at my last 75 inbounds, I counted 9 that I (subjectively) consider to be effective emails. 9 out of 75. That’s 12% for those counting at home. It’s important to qualify yourself when approaching an investor to confirm mutual fit. It’s simply unreasonable to expect an investor to do homework on you to determine whether there may be a fit if you clearly have neglected to do cursory homework on them. Pre-qualify yourself. 2/ Research firm infrastructure Once you’ve compiled a wish list of investors, leverage public channels to determine decision-making and sourcing processes of an investor. Most large venture firms have multiple associates whose main role is to source...

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Nailing your Investor Introductions

Follow me @samirkaji for my always random, sometimes relevant thoughts on the world of venture investing and startups. This is part one of two. Next time I’ll cover how to craft the perfect cold email to investors. For entrepreneurs, raising capital from external investors for first time can be incredibly challenging and frustrating. And I get it. Competition for capital is fierce. Seed rounds are up 2.5X from 5 years ago, and there are more startups than ever vying for investor attention. But far too often, I see entrepreneurs repeatedly make simple and avoidable mistakes. One of the most common mistakes, but most easily correctable, is not knowing how to effectively approach or get introduced to sophisticated venture or angel investors. Founders often lament the fact that most investors publicly say they are highly unlikely to invest in a deal that isn’t referred in from someone they trust in their network. In reality, it’s an easily explainable and reasonable stance: 1/ Time remains the most precious resource for investors, and referrals provide the necessary filter to separate noise from signal. Reasonably, the people that know you best will send you the deals they know fit your “type”. 2/ With so much information publicly available about investors and their connections, every entrepreneur should be within a single degree of almost any investor. If you can’t get a mutual contact to refer you, my visceral reaction as an investor will be a) you were too lazy to find a mutual contact or b) none of our mutual contacts were willing to endorse you to me. Neither is a positive signal, even if it may be nothing more than perception. 3/ Getting a cold email typically translates to “I’m getting an email from someone that’s doing this for the first time”. Most investors prefer to invest in repeat entrepreneurs, who have the networks to enable warm introductions. With that said, I realize that’s not a profound statement to say that warm intros are almost a must, but I do want to cover the “how” of effectively asking for an investor intro from a mutual contact. First, let’s cover what NOT to do. Please never, ever send an email like this: “Hi Samir Hope you’re well. Not sure if we have discussed, but I have launched a new software platform focused on digital currency management. We’ve been seeing tremendous growth and are ready to take the next step to really scale our business. I’m attaching our full pitch deck and executive summary here. We are looking to raise a $5MM round and wanted to see if you could help connect us to a few investors? I’ll be in your area next Wednesday and...

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The Importance of Identity

The Importance of Identity

Building a business is really, really hard. Having closely worked with hundreds of founders over the last two decades, I’ve (admittedly vicariously) seen the darker moments that invariably accompany entrepreneurship. When my long time colleague and friend Sam left Silicon Valley Bank (SVB) to join First Republic Bank (FRB) three years ago, it wasn’t the classic case of chasing greener pastures. For starters, I had spent my entire thirteen-year professional career at SVB, met my wife at the organization, and was enjoying a great position at the top brand within the venture market. So why leave? Easy. Working with operators, the entrepreneurial bug had bit us and we both wanted to take on the challenge of building something. And outside of being known for it’s platinum client service levels, FRB is an organization built around the principle that employees act as their own proprietors, encouraged to build their own franchises based on individual inspiration. As is the case with building any business, the last three years have been anything but easy. But despite long days, nights, and weekends, it’s been an incredibly gratifying experience, and one that has exponentially amplified our empathy for the founders we work with. When we left, we knew things were going to be challenging. Competition from established banks within the venture and tech space is ferocious (and we knew were we were going to be confronted with a bit of “no one gets fired for buying IBM”).   Additionally, while banks are a necessity for businesses, choosing a bank typically ranks low on the strategic decision tree for many. To build something meaningful, especially as an underdog, we knew we had to be better. For the first few months, we did what most people do when starting a new role. We took inventory, and started leveraging our rolodexes in an effort to start building a client base.   While things were going well in the early days, we knew that if we were going to create something truly unique, we needed clarity of mission and identity. Without identity, a business is similar to a rudderless ship, drifting through the ocean until a merciful wave capsizes it. But there is one important truth about identity, and it’s BFA. Be. Fucking. Authentic Attempting to manufacture identity to fit a business narrative is a suckers bet. Passion isn’t a trait that can be faked and without authenticity of mission, it’s impossible to maintain the resolve necessary to navigate the personal and professional challenges that inevitably will be presented. So in August of 2012, we decided to lock ourselves in a small conference room to determine the what, why, and who of our business. Thankfully,...

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Investing in investor updates

Investing in Investor updates While seed rounds often have 1-2 “lead” investors, participation from many investors at smaller amounts, commonly small seed funds and angel investors, is standard. Over the past few years, I’ve been a moderately active angel investor. Like most angel investors, I’m usually the smallest check on a cap table and post-investment value-add is admittedly reactive in nature. Irrespective of check size, one of my major pet peeves as an investor are companies that fail to provide regular investor updates. Recognizing that larger investors are usually in close contact with their founders, I know that following missive is primarily geared toward the lines of communication with smaller investors (for small seed rounds, this may mean all investors). Bluntly, it’s not OK to be opaque with the investors who have supported you while risk levels are at their highest. Whether as an active or silent partner, investors want to be part of the journey. More importantly, I think it’s a huge miss not to provide all of your investors with regular, effective updates. It’s impossible to optimize on your investor base without them. So what is the appropriate communication etiquette? 1/ All companies should send regular updates to their investors. The frequency is up to you based on what you think is appropriate for the business, but a normal cadence should be set. 2/ These updates should go to all investors, no matter the size of investor, with the following caveats: -There may be certain sensitive items that are only appropriate to discuss with only significant investors -As companies mature and scale, only significant investors with information rights should get these updates. 3/ A standard, succinct template should be used for consistency to aid ease of readership. In terms of length, think tweet storm vs. long form blog post. 4/ Updates should include the good, bad, and if appropriate, the ugly. Investors don’t want entrepreneurs that act as spin-doctors. Savvy investors will see past it, a chance to engender trust leaks away. 5/ Should include a clear call to action. Now most of the updates I get from founders are inherently positive, undeniably a function of the direct correlation of company performance to update frequency. Although it’s easy to shout from the rooftops when life is good, the best operators understand that the most critical investor updates occur when major challenges are present within the business. Investor updates also have the following benefits: 1/ They can serve as a forcing function for founders to momentarily untangle from the weeds and be introspective. This may inspire an idea around a new opportunity or allow you to identify a problem before it happens. 2/...

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The Past, Present, and Future of Micro-VC

The Past, Present, and Future of Micro-VC

Reposting from my entry via CBinsights . You can follow me @samirkaji for more of my thoughts on VC and tech. The Past, Present, and Future of Micro-VC Although it’s been less than a year since I posted my primer on the Micro-VC market, there have been a lot of developments since then. Loosely, Micro-VC firms are venture firms that raise funds that share the following characteristics: < $100MM in size (although most are <$50MM in size) >80% of initial checks are invested in seed rounds Invest on behalf of 3rd party investors (LP’s) Over the past 18 months, I’ve met with over 150 Micro-VC managers of all sizes, geographies, and investment themes. Before I attempt to prognosticate where I think the Micro-VC market is headed, I want to share some of my recent observations. Growth, Growth, Growth The table below, leveraging data from CB Insights along with SEC filings, displays the growth in the number of Micro-VC firms over the past five years.   *7/30/15 -Of the 236 firms identified, approximately 50% have not raised a fund over $25MM. This number isn’t really shocking given the low barrier of entry at this size – the majority of these funds of this size are closed without any traditional institutional LP backing. -Over half are located in Silicon Valley, with NY, LA, Boston accounting for just under a quarter. Rising Bar for Institutional LP’s As noted above, nearly half of Micro-VC firms have little to no institutional LP capital. Institutional capital for the Micro-VC Market includes Endowments, Foundations, Corporates, and Fund of Funds. With respect to Fund of Funds, many institutional Fund of Funds have been quite active over the past couple of years in Micro-VC, including firms like Venture Investment Associates, Cendana Capital, Sapphire Ventures, Weathergage Capital, Horsley Bridge, Northern Trust, SVB Capital, TrueBridge, Greenspring, Legacy Ventures, Next Play Capital, and Top Tier Capital to name a few. Although many allocators are still exploring new Micro-VC managers, many have already placed their bets in the space, and the rise in numbers of new funds coming to market has made it virtually impossible to separate signal from noise. Special Purpose Vehicles (SPV’s) Due to capital constraints, Micro-VC funds often struggle to take advantage of valuable pro-rata rights in future rounds of their most promising portfolio companies. As a remedy, Micro-VC managers are now very actively forming SPV’s to enable pro-rata investing in top performing portfolio companies. Keep in mind that SPV’s don’t solve for fund level economics, but offer LP’s the ability to participate directly into portfolio companies at on reduced, albeit deal by deal economics. Thus far, most have been done through offline channels, but...

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Venture Capital Blackjack

Venture Capital Blackjack

I’ve never been much of a gambler. Perhaps it stems from my last 16 years spent as a banker, or my extreme disdain for losing hard earned money. So perhaps it comes as a surprise to hear that I’m a huge fan of casino games, specifically the game of blackjack. For me, the game represents the perfect combination of probability computation, intuition, and good old-fashioned luck. Winning in blackjack is fairly straightforward. A player wins when he or she has a combination of cards that bests only what the dealer has. Predictably as with every casino game, the odds are tilted in favor of the house. Depending on table terms (# of decks, payout of blackjack, etc.) the probability of a positive outcome, actually winning money, for any given player is anywhere between 44% and 48%.   This value presumes that the player is playing “by the book” and understands what action is statistically favorable under all scenarios. Most people have either read the book “Bringing Down the House”, or have seen “21”, the movie adaptation of the book. As the story goes, a group of students from MIT University travels to Vegas, and utilizes the classic Hi-Lo technique of card counting to gain an advantage over the house. Card counting, if executed properly (much harder said than done), enables a player to improve odds of winning to slightly over 50%, a slight advantage over the house. But unlike what the movie might have led many to believe, it doesn’t guarantee success. So what do blackjack and venture capital have to do with one another? Actually quite a bit as both traverse a similar mix of skill and luck. In blackjack, accomplished players acknowledge that external and highly variable factors play a huge role in determining success; from the cards that are ultimately dealt to the behavior of other players at the table. As such, energy is focused on actions that optimize the probability of winning, whether it be memorizing scenario probabilities and/or leveraging advanced techniques like card counting to tilt odds. Over the past couple of years, capital flowing into venture capital funds is creeping toward historical highs (tossing out the edge case years of 99-00). If history serves as an effective prognosticator, fewer than 10% of these funds will generate returns that Limited Partners will deem to be successful. So why invest? The ones that are successful tend to be really, really successful. Resembling the game of blackjack, there are multiple external factors that slide the success probability needle in venture either to the right or left. Market cycles, timing of deployment, and basic serendipity all have varying degrees of positive or negative...

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Managing your network and the 1% rule

Managing your network and the 1% rule

Stating the obvious, building and managing a strong network is a critical component of success in business.  And within the world of Venture Capital, network signal strength frequently serves as the determining factor between moderate and resounding success. Unfortunately, while most people are proficient at building a network, too many miss the mark of what it means to manage an effective network. It’s not hard to understand why.  After all, offline (conferences) and online (LinkedIn) networking opportunities create new connections daily, making it tougher to determine where to spend the most valuable asset we have – time. Candidly speaking, it’s something I’ve always struggled with.  So, earlier this year I decided to do an exercise where I scoured through my entire LinkedIn connection network (nearly 2000) of them. While exhausting, it helped me surface the following observations: 1/ 1% of my connections brought me significant personal or professional value. 2/ 10% of my connections brought me any degree of personal or professional value. Perhaps I was overly myopic in my assessment, but I did force myself to think within some rather strict parameters of what value meant. From there, I checked my calendar and looked at all my appointments in the prior month.  What I found was startling.  Roughly 70% of the meetings I took were with unknowns (new connections) or with individuals that fell in the 90% bucket! Yes, only 30% of my time was being spent with the partners that were meaningful to me. I also determined that the concept of reciprocity is an important one – Most of the value I drove was to the same small group of individuals within my network. Without going into laborious depth, I’ve found that 2 things are required to have a meaningful relationship: 1/ Professional and personal compatibility – Professionally, this is easy to describe.  It’s someone that has a role that’s synergistic to your and there is clear definition as to how both parties can benefit from knowing one another.  Personally, it’s a bit trickier.  For me, the airport bar example still serves as the best litmus test. If forced to be stuck at an airport bar together for several hours, would both people genuinely enjoy each other’s company? This is usually only the case when you have two people that share similar lifestyles, personalities, and interests. 2/ Capacity and motivation to be reciprocal – Simply put, both individuals have the ability and desire to help each other (sidebar, read the book Give and Take by Adam Grant).  I’ve often met people that have the capacity to help me greatly, but with no fault to them, lack the motivation to do so. Too often, people...

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Micro-VC, by the #’s

Back in March, I posted a raw list of global Micro-VC firms that I was aware of. It remains a work in progress as new firms continue to emerge, and I’m sure there are a couple of dozen I’m still unaware of. Similar to the post from last year, I’ll be doing a full updated analysis of the Micro-VC landscape in the coming weeks, including some predictions, but in the interim, I wanted to share some of data that the CB Insights team pulled for me. Quick sidebar: The list below only includes Micro-VC firms that are consistent with the definition I’ve used in the past;  Firms raising funds <$100MM with 80% of the initial investment being “seed” stage (seed being an evolving term these days). There are exceptions such as Obvious Ventures and Felicis (which both recently raised $100MM+ funds) but keeping them in for now. Below is the updated list of Micro-VC’s, along with the following fields: Investments: The number of new investments the firm has made over the preceding 12 months. Average Round Size: The average deal size (in $M) of rounds that each investor participated in within the same time frame listed above. Median Round Size: The median deal size (in $M) of rounds that this investor participated in within the same time frame listed above. Institutional Co-Investors per deal: This outlines the size of the institutional syndicate in a given round of capital. Ok, now some general caveats about the data below: 1/  CB Insights did not have deal data for the entire universe of Micro-VC firms (either because the firm is new with little data, or the investments made were not reported or announced on any public source). 2/ Private data is inherently imperfect – Many deals that are done are stealth. Others that are announced do not disclose a full roster of investors. CB Insights does a great job leveraging private/public data, but due to the aforementioned, the #’s below are likely understating investment activity to varying degrees depending on the investor. If anyone is interested in providing more accurate info about their firm, please send me via LinkedIn. 3/ The data below includes initial investment only, not follow-on financings. As mentioned above, I’ll do a full summary write-up later this month, but here are a few summary comments: 1/ Average of deals done over the previous 12 months by the data set is 6.87, with the median being 5.  Unsurprisingly, 500 Startups, SV Angel, and Lerer led the way with 78, 57, and 30 deals respectively. 2/ Looking at the average round size of each investor, the average round size of the data set is $5.6MM while the median of data set is $3.35MM. 3/ Looking...

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Introduction Capital

Introduction Capital

On a weekly basis, I typically provide and receive dozens of introductions. When done correctly, introductions can translate into incredibly meaningful business and personal relationships. As we all know however, the vast majority of introductions that are made miss the mark. The art of the introduction has been covered with great intensity within industry circles. Specifically, the “double opt-in” introduction is widely viewed as the most appropriate (and perhaps, only) method for facilitating introductions. For those not versed, the double opt-in introduction is an introduction that is made between two parties only after both sides separately acquiesce to the introduction. On a fundamental level, I couldn’t agree more. It guarantees that each party agrees that either (or both) business or personal value can be derived by the connection. In practice however, massively increasing workloads and the velocity of introductions that need to be made often make double opt-in’s incredibly difficult to manage. This might sound like a poor excuse, but I view it as acknowledgement of the non-utopian world we live in. So double opt-in’s are ideal, but what to do if they are not always possible? Before I address ways to effectively make non-double opt-in introductions, let me offer why most people make introductions – simply, to showcase network reach and signal strength. These “selfish” introductions are intended to generate goodwill with both parties that presumably will translate into some sort of future tangible economic or social benefit for the connector. And I think it’s ok. Not all introductions need to be motivated solely by altruism, but the parties you are introducing should be receiving similar or greater value than what you receive. What most connectors fail to realize is that every introduction either generates an increase or decrease of social capital and trust – I like to think of this as “introduction capital”. The double opt-in solves addresses most of this, but since we’ve discussed that it’s not always possible, here are ways that a non-double opt-in may be ok. 1/ You’ve received prior agreement from a party that blind introductions are ok from you. For example, let’s say Jack has asked you to be introduced to Bill. In the past, you’ve gotten the green light from Bill to freely make introductions as you see appropriate. Unless something has changed, this is ok. 2/ The small “wedding” test. If you personally were invited to someone’s wedding, you likely have a close enough friendship where blind intros occasionally are ok (rather than these “so and so is a good friend of mine” when you haven’t spoke to the person in 6 months). I have many friends who will make introductions to me, and...

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Great expectations

A conversation I had with a founder friend last week reminded me of a recent episode of the HBO show Silicon Valley. In the episode the main character, Richard Hendricks, who plays the role of CEO of a hot tech company decides to accept a financing offer despite the presence of a seemingly better deal that valued the company higher and provided it with more money. The rationale for him was that while more money at a higher valuation was attractive in the short term, it posed more risk and could potentially have torpedoed the company by the sheer weight of unrealistic expectations. An interesting concept, and one I think worth further discussing. After all, expectations represent the anchor that we (and others) use to define whether efforts are successful or not. Unrealistically high expectations reduce the probability of ever perceiving success while low expectations rarely translate to any “success” representing anything meaningful. In the public markets, companies that beat analyst expectations often see their stock prices soar, while ones that fall short see their shares take a beating. In the world of sports, the more success a team or athlete enjoys, the more we expect of them, regardless of how unachievable or unreasonable the expectation. In the world of startups where large funding announcements and “Unicorns” dominate headlines, the concept of expectations often gets overlooked. Now going back to my friend. He had been working on finalizing a rather large seed round and was just about to sign off on a term sheet from a reputable seed venture capital firm. All great news, but at the last minute, he was sent another offer that provided nearly twice as much money at a valuation that was nearly 70% higher than the first.   The new investor had a good reputation, and seemingly could bring good value to the company. While he acknowledged that his visceral reaction was to accept the new offer, he hadn’t committed and asked me what I thought. Similar to the public company example above, I explained that private market psychology is no different. When investors invest in private company rounds, they are buying a call option that presumes that the price of a share will increase in the future. While there aren’t any private market analysts pegging specific valuation or sales targets for companies, there are very real intrinsic expectations. Companies like Clinkle and Color, both of which received substantial sums of capital early are examples of companies whose expectations were set so high by their investors and team that even moderate success would’ve been considered failure (yes, there were other reasons for them not succeeding as expected, but expectations exponentially...

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Micro-VC, from the eyes of an institutional LP

A lot of new Micro-VC firms have been formed over the past couple of years. A lot. For some, it may seem like anyone that has a good story and a PowerPoint can raise a fund. Having lived through the process vicariously through dozens of new managers, I can tell you that raising institutional capital can be very tough for first time managers.   And in many ways, despite the bull market we’re in, it’s much tougher to raise institutional capital today than it was 3-4 years ago. Some institutional LP’s have placed their bets within the Micro-VC sector and are in wait and see mode while others struggle to differentiate between the constant inflow of new manager slide decks. To get into the heads of institutional LP’s around Micro-VC, I took some time over the past few weeks talking to several about how they analyze new (and often unproven) venture managers. For ease of readability, I’m narrating the collective thoughts of the institutional LP’s I talked to in the first person. Motivation One of the things I’m going to be very interested in is understanding what inspired you to start your own firm/fund. As an institutional investor, I’m looking to invest in your franchise and not a single fund. As such, I want to know that you have been thoughtful around why this is the direction you’re taking your career. In a bull market like today where the velocity of capital is high, it’s sometimes difficult for us to differentiate between managers that have true conviction to build a great long-term franchise versus part time hobbyists who are cashing in on the current wave. Make sure it’s a question that you ask yourself before pitching. On what is important to us? 1/Founder endorsements – Assuming I get this far in my diligence, I want to hear that the entrepreneurs you’ve backed are your biggest cheerleaders. While I want founders to say great things about your character and acumen, I’d really like to hear tangible examples. It could be how an entrepreneur went to bat to protect your pro-rata or how you were their first call when they started a new company. 2/Hustle factor – Pure and simple, Micro-VC investors need to convince me that they have the same hustle as the entrepreneurs they invest in. I want to feel that you’re going to run through walls to make the firm and all of its constituents successful.   With the level of competition for the best entrepreneurs, we’re going to lean heavily to those firms whose core philosophy is built around outworking the competition and being resourceful. 3/Differentiation – The most interesting funds to us are ones those...

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Mapping out Micro-VC pt. 2

Recently, I aggregated a list of all the Micro-VC firms I could find.  As I indicated, the number of these type of firms has exploded over the last few years (by note, ~50% of the Micro-VC market was not in existence prior to 2011). Drilling down a bit into the list, below are some illustrations that provide a more granular view on distribution by geography, fund size, and gender. Geography  Not surprising to discover that nearly 50% of Micro-VC’s are Silicon Valley based, although I was a bit surprised to see such little representation in Boston and LA (12.3% of the Micro-VC market). Gender Much has been written about the gender disparity within the venture capital industry. In Micro-VC, the numbers fairly evenly mirror the broader ecosystem (something that surprised me).  Of the 220 firms I found, 16% included at least one female general partner.  When taking all of the partners at Micro-VC firms into account (many have 2 or more investing partners), the % of female partners within Micro-VC dropped to ~7%.  That said we’ve seen some positive momentum within the segment as female led firms such Forerunner, Cowboy, Illuminate, AlignedVC, 112.VC, Array Ventures, and Allegro Ventures have all raised in the last 12 months (at the time of this writing, a couple of the aforementioned are in midst of an imminent close). Fund size  Funds $0-$25MM comprised nearly 45% of all Micro-VC funds raised (only most recent vintage was used for this calculation). Reasons for this are fairly simple from my perspective: 1/ Prevalence of single GP funds 2/ Lower barriers to entry – A large majority of funds <$25MM have limited partner bases that are predominately/fully non-institutional in nature. 3/ Marked increase in freshman funds over the past 24...

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The risk equation of Venture Debt

The case for venture debt for early stage companies is fairly easy to understand. Company X raises a $5MM Series A round from venture capitalists, providing for approximately a year of cash runway based on a projected cash burn of $400K/month. During this time, the company will scratch and claw to meet as many operating milestones as possible to with hope that the next round of capital is completed at a significantly higher valuation. Time being rarely a friend to a startup, the management team contemplates layering on $2MM in venture debt to increase cash runway by 4-5 months.  The incremental financing is expected to provide the company with the needed breathing room to cushion against inevitable milestones delays and/or will provide the added juice to move the company into hyper growth earlier than originally planned. All the company needs to do is pay a small interest charge and take on a bit more dilution by providing warrants to the lender (typically 10-20x less dilutive than equity). Factor in the current hyper competitive debt landscape where capital is both cheap and abundant (particularly with regard to bank lenders), and you have the perfect product right? Well. Sometimes. Maybe. But maybe not. Last year I mentioned that venture debt at the early stages was probably overused as a default vehicle.  I think that’s even more true today. @Samirkaji @dcurtis @hunterwalk exactly — Jonathan Abrams (@abrams) March 10, 2015 I won’t reiterate my last post, but I do want to emphasize that the seductive nature of easily attainable non-dilutive capital has creates a world where companies are going too far on the risk curve too early. What I’m specifically referring to is the disturbing trend I’m seeing of management teams treating debt analogous to equity.  And many lenders are happy to oblige to this through increasingly more flexible structures and larger commitment sizes. Where I’m most concerned is when I see companies utilizing the additional dollars in the vault by prematurely going into hyper growth mode. It’s not too dissimilar to what we’ve observed within the “unicorn” landscape where some companies have seemingly eschewed financial fundamentals in favor of optimizing for growth of a single top line metric. The truth is that excess capital of any size lowers adversity to risk taking. With just equity, if major milestones are not hit, it’s a bad thing, but often recoverable.  When debt is added to the equation, the results can be catastrophic and non-recoverable.  Fundraising becomes more complex and balancing fiduciary responsibility with the lender can be both difficult and distracting (usually at a time when distractions can be ill-afforded). So is venture debt bad for early stage companies – Of course not, although I’m not in favor of...

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Mapping out Micro-VC – Updated 8/7/2015

Mapping out Micro-VC – Updated 8/7/2015

Just last week, I wrote about the evolving Micro-VC market.   Following that post, I received notes from several firms that wanted to confirm they were part of the data set (236 firms).  Many weren’t, so I spent a few minutes this weekend adding in the names. The updated count? 250 firms, although I’m confident we’re still missing a few. Boston – 15 SoCal – 17 NY – 33 SF Bay Area – 115 Rest of country/world – 70 A few notes: 1/The fund sizes below represent the size of the current fund the firm is investing from, not AUM of firm. 2/Some of the firms below are still in fundraise mode, so some may graduate to higher fund dollar classes based on future closes. 3/With respect to geography, all Bay Area firms were categorized as San Francisco (versus categorizing them by city).  SoCal firms were categorized as LA (sorry). “Other” references geographies outside of Boston, NY, SF, and LA. I’ll break it out later in more detail, but it’s what I’ve used for tracking purposes. 4/Many firms on the list are multi-geography in nature, so I had to judgement to deem a HQ. 5/The buckets are in $25MM increments; As such, the $0-$25MM range may include a $2MM fund or a $25MM fund. 6/Form D filings were used for some, so it’s likely some managers raised far more or less than what the filing indicated. 7/Not all of the firms listed would consider themselves Micro-VC’s, but it’s my list. I’ll likely update this list at some point with sector/stage focus/average initial check size once I find some time to do so. Finally, if I’ve missed any names or mistaken profiled any firms (I’m sure I’ve done both significantly here), please contact me so I can update. $0-25MM 212 Capital Partners Florida Multi Sector 55 Ventures SF/NY Multi-sector 645 Ventures NY Multi-sector Accelerator Ventures SF Multi-sector ACE & Company Switzerland Muti Sector Advancit Capital Boston Multi-sector AF Square LA Multi-sector Allegro Ventures SF Multi-sector Arcus Ventures Chicago Multi Sector Arnold Capital SF Multi-sector Array Ventures SF Enterprise Base Ventures SF Multi-sector Bassin Ventures SF Mobile Bee Partners SF Multi-sector Belle Capital Mi Multi-sector Bennu SF Multi-sector Blackbird Ventures Australia Multi-sector BOLDstart Ventures NY Enterprise Bolt Boston Hardware BoostVC SF Multi-sector Bootstrap Labs SF Multi-sector Brooklyn Bridge Ventures NY Multi-sector Canyon Creek LA Multi-sector Center Electric SF IoT Coent Venture Partners Singapore Multi-sector Commerce VC SF Commerce Common Angels Boston Multi Sector Core Ventures SF Enterprise DAN fund Tx Multi-sector Darling Ventures SF Multi-Sector Designer Fund SF Multi-sector Detroit Venture Partners MI Multi-sector Divergent Ventures WA Multi-sector Dorm Room Fund NY Multi-sector Double M Partners LA Multi-sector...

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Seed rounds: convertible notes < priced equity?

While I haven’t seen authoritative numbers around convertible note usage for seed rounds, I can confidently say that the overwhelming majority of seed deals completed in Silicon Valley are done through convertible notes. In fact, while I get a ton of questions daily from entrepreneurs about the nuances of seed financing, the questions rarely stem around whether they should raise through a priced round or a convertible note. The latter is usually a foregone conclusion – not because of any particular financial or strategic rationale, but rather a byproduct of conventional “wisdom”. Wisdom that has come under some fire from investors. While I do think that priced rounds are much better in general than notes, I’m not here to take a hard line against notes (as in certain cases, they could make good financial sense).  Instead, I just want remind entrepreneurs to consider the facts before defaulting to a note option. A few summary points to consider: 1/If you set a cap, you are setting a valuation. It’s the figure that your current and next round investors will anchor around. 2/If you don’t set a cap, you’re screwing your convertible note investors and probably yourself. I can’t imagine any smart, value-add investor today investing in a no cap note that doesn’t contain any protections. 3/Things can get messy at conversion if you do multiple notes or have notes that have multiple caps. 4/Priced equity rounds are cheaper and faster than ever to do (which was the primary argument for notes). 5/You can do rolling closes with equity rounds. 6/While it’s true that notes don’t absolutely require a lead, that’s a not a good thing. A bunch of lottery ticket investors isn’t what you want as it’s much better to have 1-2 investors that have true conviction and have financial incentive to help. 7/Many institutional investors won’t participate in anything but a priced round. 8/While you do get to “punt” some of the term negotiation to later, I don’t know why that’s necessarily a good thing. Now back to my earlier point about notes making sense in certain situations. One example is if there is a defined short fuse to the next round of capital (3-4 months), and you just need a bit of liquidity to get there. An uncapped note with a discount is the best form of financing here. Regardless, if you opt for a note for a standard seed deal, here are few recommendations: Be thoughtful about the cap you set if you have a capped note. Check out whatever data is available. Talk to other entrepreneurs and investors. But never set it based on edge cases – I.e. “I think the cap should be “$X” because...

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