Category: Venture Capital
Tom and Tony of tastytrade talk with Brad about Foundry Group, Techstars and Bootstrapping…
Q: As a rookie VC trial by fire is a great way to learn. Aside from crunching through some early deals, where are the best executive programs and crash courses for newbies to the VC world?
A: While self serving, we recommend you start with our book – Venture Deals: Be Smarter Than Your Lawyer And Venture Capitalist. In addition, there are a bunch of courses now using the book that are referenced on the web that include additional materials that are helpful.
Jason also did an excellent Crash Course on Venture Capital – the 90 minute video is below.
There is also extensive information on the National Venture Capital Association website, the four day Venture Capital Institute is entering its 38th year, and the Kauffman Fellows Program is entering their 18th year.
If you know of other web based resources, please add them in the comments.
Today’s VC Post of the Day is from Ahmed Takatkah, a VC in Jordan titled The Next Big Thing in VC. He starts with a question and the answer he often gets.
“What’s the next big thing in VC?” Whenever I see a VC from the states or even from the region, I ask this question, but none of them gave me a satisfying answer. I will share my answer here and hope that this will stimulate others to comment with different point of view.”
He starts by explaining what he thinks has been happening: Faster Exits, Active Private Capital Markets, The Rise of Accelerators, and Changes in the VC Model and then goes on to predict (and explain) a few new ideas of what might happen: Elevators, Carry Options for Entrepreneurs, Capture Capital, and Cafe Startups.
It’s good stuff and worth reading if you wonder what “the next big thing is VC” is.
Fred Wilson (USV) has today’s VC Post of the day titled Herky Jerky Investing. In it he refers to a WSJ article where several very prominent VCs have recently said they are backing off investing at frothy valuations and now going and looking off the beaten path.
Fred – as usual – has very a very focused reaction to this:
“I am not a fan of this start and stop style of investing. Nobody can time markets. You can’t deliver great returns to your investors by being a momentum investor during some periods and a value investor in others.
I believe the only way to be a top performing investor in any asset class is to have a disciplined investment strategy and approach and apply it consistently and actively in all markets all the time.”
I (Brad) strongly agree and weighed in with my own comment with a cynical view:
“I had the same reaction to the WSJ article. Actually, I had a stronger reaction: “what a load of bullshit – why does the WSJ publish stuff like this and why do VCs say things like this?”
The only thing I could come up with is that it’s actually a head fake from the people saying it with the goal of getting some of their fast followers – VCs who are investing with them, competing with them on “hot deals”, and driving prices up to “slow down and blink” so there’s less competition.”
The comment thread on Fred’s post is very interesting – I encourage you to go take a look and form your own opinion.
Question: How do VCs mitigate risk in their investment portfolios? Are VCs simply looking to diversify the type and stage of companies in which they invest, or do they employ other financial hedging strategies?
I’m not aware of VCs using classic financial hedging strategies. In many cases, they are prohibited from doing this by their LP agreements and/or investment documents in the companies when they make an investment. While I’m sure there are some folks that do this, I don’t believe it’s prevalent.
The primary ways VCs mitigate risk are (1) time diversification, (2) stage diversification, (3), sector diversification, (4) pro-rata or over pro-rata investing over time, and (5) number of investments in the portfolio.
1. Time diversification: Most VC funds are committed over a three to five year period. The commitment period for most funds is five years – by spreading out the commitments over a three to five year period, a fund gets time diversity and theoretically smooths out some of the macro cycles. Most VCs who have been investing since the mid-1990’s understand this well as many funds raised in 1999 and 2000 were fully committed in one year. As a result, the funds were invested during the rapid rise and peak of the Internet bubble, resulting in horrible performance for 1999 vintage funds due to their lack of time diversity. The firms that committed their 1999 over a three year period vs. a one year period ended up making a number of investments as the bubble burst, including many that ultimately ended up being successful.
2. Stage diversification: Some funds have an early stage and late stage investing approach. The VC industry went through a phase post 2000 where there was a shift in some early stage firms to mid and later stage investing as well as a phase in the late 1990’s where early stage firms created growth funds to augment their early stage strategy. Today most of the firms that did this have settled on an integrated early / late stage approach within a single fund. Recently, many larger firms who had drifted away from seed stage investing have created new seed programs.
3. Sector diversification: Historically, a number of VC firms had broad sector diversification, investing in software and life sciences companies out of the same fund. With the rise of clean tech investing in the mid-2000’s, many software oriented VC firms started clean tech practices. This ebbs and flows.
4. Pro-rata or greater: Most firms reserve the right to invest their “pro-rata” ownership in future rounds, allowing them to keep their percentage ownership in the company. This is both a downside and upside strategy. More recently, some firms have started aggressively buying additional ownership in their winning companies.
5. Number of investments in the portfolio: There is conventional wisdom that each fund should have 25 – 30 companies (or “names”) in each fund. Recently, some firms have taken a more extreme approach with upwards of 50 or more companies in each fund. Regardless, if you are playing for big wins, making sure you have enough investments in each fund is important.
There are other diversification approaches like geography (e.g. investing in the US, China, and Israel), but these tend to be limited to a few very large firms.
Today, we were asked the following question:
‘”Why don’t VCs tell you the reason why they don’t invest? Any feedback would be useful. It’s just plain rude.”
I (Jason) figured that this is really a personal question, so I thought that I’d post on my personal blog, as I certainly can’t speak (or even guess) the response for the entire VC industry.
You can see Jason’s thoughts here.
I (Jason) get asked often how I got into venture capital and how interested folks may get involved as well.
I always tell them that I "fell" into the job, as most folks that I know who are VCs and that everyone has a different and unique story.
I then point them to my partner Seth’s blog post on the subject which I think is the best written authority on the subject.
Today, however, I received a paper that one of my students, Judd Rogers, wrote on the subject. He takes Seth’s thoughts and puts a little bit of analytical muscle behind the subject. It’s an interesting read for those wanting to know potential career paths toward VC.
I (Jason) will be visiting the University of Michigan in a couple of weeks to speak to different campus constituencies about entrepreneurship and venture capital.
As part of that, I’m going to plant my butt in a conference room on campus for a couple of hours and talk to anyone that wants to come by and chat, pitch me, talk about venture capital, etc.
Location: Lorch Hall (Economics Building) Room 171, 611 Tappan, Ann Arbor
Time: 3pm to 5pm
Date: Friday, April 3rd, 2009
Students, professors, members of the community all invited.
Q: With a number of great companies being born of ideas coming from a youthful group of entrepreneurs, how are investors reacting to twenty-somethings fresh out of college, with little to no professional experience, without a strong network of seasoned industry experience and with a inconceivable amount of life learning still ahead of them?
Assuming all else is favorable in an investors eyes, what are investors weary of and how can young entrepreneurs prepare for this? In addition, what advice to you have for the young person seeking to build a team of "time-tested, battle-hardened" professionals?
A: (Jason) We think young-entrepreneurs are great. In fact, we like spending time with the younger set so much that we are active mentors and investors with Techstars. And certainly with our fund, we wouldn’t hesitate to fund a first-time entrepreneur with a great idea.
I think the key to being a young entrepreneur is being self aware. Know what you know and also know what you don’t. If you can communicate to a prospective investor that you are smart, have a great idea AND are emotionally intelligent and realize what other skills sets you’ll need to surround yourself with, then I don’t think being young and / or inexperienced will hurt your chances. In fact, youthful exuberance is infectious and sometimes younger folks will think outside the box more often than older ones who are set in their ways.
What we are weary about would be the young / first-time team that thinks they "know everything." I’ve seen this from time-to-time and it’s an immediate turnoff. One can still be confident and driven and self aware. No good and experienced VC would expect a twenty-year old to know everything and be prepared for anything that can happen in a startup company, so don’t pretend that you do. Even after all of our years, we still haven’t seen "everything."
The key is putting a good team around you, or asking your funding partner for help and advice in building a team. Make sure that you have this discussion BEFORE you commit to an investor, as you don’t want an after-investment surprise.
Most VCs have great networks of executives and can help place particular skill sets into their companies. Otherwise, you can put together a team before taking on funding and to attract the "veteran" players, you’ll have to have a compelling idea and a mature set of twenty-somethings (in your case).
Good luck to you.
I give a 25 minute presentation and then hold an hour town-hall question and answer session. Great questions were asked, so if you are interested in what goes through a VC’s head, take a gander.
The video is really well done. The slides are integrated into the presentation. I’d highly recommend Craig Kendall if you need any video creation or editing work. Thanks Craig for putting all the time into the video. Here’s a bit about Craig:
Founded on 13 years web and video experience and a passion for top quality video, Craig Kendall is the founder of Kendall Media Group and eventon.tv. Currently partnering with many Boulder area technology programs including IgniteBoulder, the Boulder Denver New Tech Meetup, and Silicon Flatiron’s Crash Course for Entrepreneurs, eventon.tv is helping provide video recording and production for the web. Having recently returned to Colorado after 13 years in Tennessee, Craig is thrilled to be part of the technology community in Colorado."There’s some really amazing things happening in the Boulder/Denver area as far as technology and entrepreneurship and Kendall Media Group is excited to be a part of it," says Craig. Reach out to Craig at craig at kendallmediagroup dot com.