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Posts tagged with ‘vc’

In a world where money is a commodity and startup funding is just a matter of being part of a platform, there is one thing that will always be unique: people and what they bring to the table.

The One Thing VCs Could Do Immediately to Increase Returns - Nilofer Merchant - Harvard Business Review →

Nilofer skewers Ted Schein of Kleiner Perkins, who insists that VCs are ‘color-blind’ despite all the evidence. 

Ted Schlein, general partner at Kleiner Perkins, was recently invited to discuss race and investment in technology. The conversation took place at an inaugural conference called Platform, created by Hank Williams after a provocative series that Soledad O’Brien did on CNN on black entrepreneurship. At Platform, luminaries like Quincy Jones and Governor Deval Patrick, as well as entrepreneurs like urban revitalizer Majora Carter, and Juliana Rotich of Ushahidi came together to discuss what specific changes could be made to have all aboard the innovation economy.

And so all ears were tuned in when well-known VC Ted Schlein of Kleiner Perkins started talking… but Ted denied there was a problem. Despite the story the numbers tell — women receive less than three percent of all venture capital funding, and blacks even less than that — Ted said that the venture capital community was “color-blind” and “operates fully on a meritocracy.” This continued argument disregards the astounding facts that essentially 100 percent of funded founders are white or Asian, and 89 percent of founding teams are all-male.

Since then, we’ve had the case of Paul Graham, whorecently got into a brouhaha because he claimed a correlation “between founders having very strong foreign accents and their companies doing badly.” He continued to dig into his argument, believing people were simply misunderstanding him, but he doesn’t acknowledge the facts: immigrants with accents do found successful startups, but often without VC support. Kauffman Foundation research shows that more than half of Silicon Valley start-ups are founded by foreign-born entrepreneurs. Imagine if those with accents could get your support — what tougher problems could they solve?

And who can forget that only two years ago, Vinod Khosla saidthat only the young can innovate. “People under 35 are the people who make change happen,” said Khosla, who explained his belief that old entrepreneurs can’t innovate because they keep “falling back on old habits,” because “people over 45 basically die in terms of new ideas.”

So, basically, if you followed this limited logic… you’d hear that if you’re a woman, black, foreign, or old, you need not apply; you will not be seen. No matter how good your idea could be. No matter how many lives it could save, or new solutions you create, or how much revenue it could generate.

At the core, VCs share a culture which like all culture has foundational beliefs that are generally unspoken and which are taken as givens. VCs — and the larger tech community — wants to believe their culture is meritorius, and that the ones that become successful succeed on their talent, not on luck or privilege. As a result, they will disregard evidence to the contrary and exclude those that say the unspeakable.

Nilofer wants to change that culture, and hopes that a group of influential figures might step forward to make that happen. My bet is that we need a shift in the larger culture, the one in which VC culture is embedded and from which it draws it power, before we will see very many more black, brown, or female faces at venture-backed start-ups or VC firms.

It’s Not The End Of Awesome, Just The End Of Huge Valuations

Derek Thompson thinks things are going to be less awesome, from here on out, because of Facebook’s failed IPO:

Derek Thompson, Why the Social Media Revolution Is About to Get a Little Less Awesome

If we’re graduating from the “making delightful and cheap things” stage of the social media age to the “making money” stage, make no mistake: Things will get less delightful. In order to be profitable, it is highly likely that Twitter can only get more annoying, Pandora can only get more interrupt-y, Tumblr can only get more cluttered, Facebook can only get more devious, and the app baubles on your iPhone can only get more expensive.

The first few years of the social media revolution have been a golden age of tech utilitarianism, where maximizing users’ delight was considered, quite literally, the only currency that mattered. In Part II of the revolution, the desired currency is poised to change from attention to profit. That’s a shame. It doesn’t mean that the programs you love are anywhere close to coming to an end. It just means that things are about to get a little less awesome.

So the argument is that start-up investors — venture capitalists, principally — will start to demand more aggressive returns earlier, and will compel the entrepreneurs in their portfolio companies to build in more advertising, sponsorships, or other revenue sources earlier.

But what about the Darwinian laws involved? If Instagram had launched with ads all over the user experience, or demanded credit cards before the first upload, would people have adopted it? If Twitter was squirting sponsored tweets at us back in 2007, would we have joined?

The answer is ‘No’.

And Thompson’s arguments are based on the assumption that all the players in the market are moving in unison, like a giant stampede of buffalo. While VCs have some characteristics of herd animals, the smartest ones will continue to focus on early user adoption based on exceptional user experience as the primary indication of the future value of an investment.

What is more likely, however, is the ratcheting down of projected returns, and a decrease in the valuation of even the largest social players. That doesn’t mean the companies won’t get funded, it just means they won’t be able to hire and grow so fast. It will slow competition, not end it. And it won’t change the basis of competition, which is user adoption, not happy VCs.

So, in the final analysis, this may all be sour grapes. The VCs wanted billions, so they put in many, many millions, which the entrepreneurs were happy to take at inflated valuations. And now that the IPOs go south, the VCs start wagging their fingers at the entrepreneurs. But the investors are the ones who goofed, big time, not the developers of these tools. And the VCs are supposed to be the grownups.

Fundamentally, the investors shouldn’t have let ‘awesome’ push up the projected returns in their spreadsheets so far: they should have counseled the entrepreneurs to grow slower, and burn less money, but the herd wanted big returns, and fast. 

The End Of Silicon Valley?

David Sacks of Yammer wonders if Silicon Valley — meaning the venture-backed bastion of innovation and wealth creation in the Bay Area — has started to lose it’s mojo. His argument — more of a handwave really — is that a/ the economics don’t work in a system with such large incumbents (like Google, Microsoft, Apple, Facebook, etc.), b/ partly because todays agile, ramen-fueld startups don’t have the cash to effectively compete against the incumbents, and c/ the number of ideas that can be juiced into existence given that context are few.

It’s important to consider his arguments in light of what happened to Yammer. My belief is that Sacks intended originally to IPO to raise a large pile of cheap cash so he could effectively compete with SalesForce, Cisco, SAP, IBM, and Microsoft. However, the declining fortunes of Facebook, Groupon, and Zynga made an IPO unattractive or impossible (considering the huge amounts Yammer had raised). So Yammer was left in the unenviable position of having to fight it out against these huge established competitors, all of which fielded competitors to Yammer… except Microsoft. And Microsoft could have made the argument that they could knock off Yammer’s technology in a few months, if necessary. So, he gave in, and accepted the deal.

So, we are seeing — at the least — the completely maturation of this generation of work media tools, like Yammer. These are stream-based coordination and collaboration tools, intended for use behind the walls of the business, and which play a key role in the socialization of business. (I think there is another generation coming, based on other principles, but I’ll leave that for another post.)

Sacks looks at this corner Yammer found itself in, and thinks we’ve hit peak Silicon Valley (= peak VC + peak tech incumbents).

(There is an echo of the recent brouhaha around Dalton Caldwell’s encounter with the inner circle at Facebook, where they basically offered him a deal and said ‘surrender, or be crushed’.)

Most of the commentary on Sacks’ Facebook post is about point c, Sacks’ comments about the small number of ideas that can make it in today’s environment. Like George Zachary’s channeling of Chance the Gardener from Being There:

As long as the universe keeps changing, there is opportunity.

or Andreesseen’s generalization to Sacks’ question about how many ideas can get through this context,

An infinite number — human creativity is limitless. Which doesn’t make it easy, but does mean the opportunity is unending.

But they aren’t answering his question. He’s really saying, yes, a turtle can lay 1000 eggs, but in an environment with  dozens of hungry seagulls, how many make it off the beach? Or past the sharks? The commenters keep focussing on how many eggs can be laid, but not the beach, the gulls, or the sharks. 

The prediction that we’ve come to the end of all useful inventions is dumb. Julius Sextus Frontinus, Roman Engineer said 'Inventions have long since reached their limit, and I see no hope for further developments' back in 10 AD. But I don't think Sacks is saying that. Sacks is saying that the game is rigged so that innovators are in an environment that makes it harder for really innovate ideas to escape the current VC/incumbent trap, and that's a discussion worth continuing.

The challenge for VCs is that it is easy to spend a lot of time going nowhere on advised deals. Good advisors know that the way to reach the highest price is to keep investors guessing about whether they are going to win the deal. As a result there is usually at least one VC who invests a lot of resources and then loses. And when you lose a deal as a VC you are left with very little, and often precisely nothing, to show for your efforts.

I am much more excited, however, to see an email from someone I respect who is helping a company because he is on the board or board of advisors. I generally feel that my chances of success are much higher from this kind of introduction because it will be less widely shopped, and, ceteris paribus, it will get more attention than an advised deal.

– Nic Brisbourne, Advisors: they don’t help VCs, but they can help start-ups via The Kernel

This is one of the reasons that I recommend to my startup clients that they create a real advisory board, people that will play an active, although very part-time role working with the company, and that the introductions from those advisory board members are worth a lot. 

I don’t approach VCs with seven deals a month, so if I were to contact Nic Brisbourne with something, he’d likely take a meeting. (Nic’s a friend, by the way.)

Silicon Valley’s dirty little secret is that the startup boom is mostly a disguised jobs fair that directly benefits the big corporations. Occasionally, an innovative startup makes it past this stage but it has to be so bad that no one wants it — not even for its team. It’s from among those ugly ducklings that the swans of the new age emerge: FB, Goog, Twitter, Yahoo! and others — no one wanted them at first, then they couldn’t get enough of them.

The Pig Passing Through The Python →

Bryce Roberts reports on two related and converging trends: the slow-down of investment into non-premier early-stage VC companies, and the number of early-stage companies shopping themselves around to prominent start-ups. Early stage capital is drying up, and that means a rafter of early stage companies won’t have adequate capital to lift off.

Tumblr Investment Values Start-Up at $800 Million - Spencer Ante →

Tumblr is about to raise a serious round with a serious valuation:

The New York-based company is poised to raise $75 million to $100 million in venture capital, an investment that will value the company at $800 million.

I profess ignorance and I use that as a tool. I can assess market attractiveness. I can assess the management team. We then make absolutely no assumption as to what’s going to work because if you do, you lock yourself into a strategy that you haven’t [yet] proven. You tend to be internally led rather than market led. This is where the risk may seem inconsiderate because you’re willfully declaring ignorance about the market you’re addressing.

bijan sabet: Inside rounds →


Historically it’s always been a weak signal when a VC backed startup needs to raise money from the inside investors, aka as the inside round. But I never understood why. If the current investors love the company, they should keep investing as the company grows. Why do they need outside validation?