Last month, we talked with Jon Callaghan of True Ventures and marveled at the billion-dollar-plus return that his firm is poised to reap from leading the seed round of the wearable fitness company Fitbit.
But True isn’t the only venture firm for which Fitbit is a giant home run. During a recent sit-down with Jeff Clavier, founder of the venture firm SoftTech VC in San Francisco, he joked that as another investor in Fitbit’s seed round, he finds it hard not to take a daily interest in the share price of the company, which went public in June and is now valued at more than $7 billion. (Its lock-up period ends in December.)
More from that recent chat follows, edited for length.
TC: You moved up to San Francisco from Palo Alto a couple of years ago. How’s it going? How many companies do you have up here now?
JC: We have several dozen portfolio companies in San Francisco and three more in Oakland. We started out in Palo Alto 11 years ago, then three years ago we started hanging out at [the San Francisco workspace collective] Founders Den and having weekly meetings there. By the time AOL kicked us out of its buiding in Palo Alto two years ago, there was no point in looking elsewhere because freaking Palantir [the private data analytics company] had killed the startup activity.
TC: Meaning?
JC: No one can compete with them for corporate space. They must have between 18 and 24 offices at this point. At 6 p.m., you see the ants coming out to eat at all the Palantir canteens, including a former coffee shop around the corner from my old office. There’s nothing else happening now in downtown Palo Alto.
It is what it is, and we go where the founders are. We’re lucky to have moved to San Francisco when we did and grabbed this awesome office.
TC: Since we’re here, let’s talk bubbles. Are you getting nervous?
JC: We’re getting nervous in terms of overall froth. Whether it’s seed, Series A, B, C, growth, or pre-IPO, the public markets feel the least bubbly right now, with companies that don’t have the proper behavior getting shredded. I bought some GoPro at the wrong time in the public market and I’m down like 40 percent. There’s more reasoning in the public markets than the private markets, where multiples are just crazy.
I don’t think all these [still-private] companies will die, but there won’t be anywhere for them to go. The public markets aren’t interested in profits without growth. And if you can’t sell and you can’t go public, then you’re stuck.
The valuations have real consequences in terms of recruiting and acquisitions, too. One of my companies was going to make an acqui-hire and [the target] had another option but it turned it down in part because [the other option] did not have a ton of upside.
TC: How’s the market impacting how you do your job?
JC: The only way to play the market is to be consistent. We always invest in three to five companies every quarter. We’ve now made 170 investments over 11 years, which comes out to 15 deals per year. Certainly, the rounds at which we invest are larger, but so is the fund we’re investing. You might wonder if we have a larger fund because the rounds got larger or the rounds grew larger because people like me raised larger funds. The answer is more contextual, though. Because you have so many more seed companies entering the market, all the Series A and B firms can demand more in terms of traction or revenue numbers or whatever metric they decide on, which means it takes more time to get to the Series A round and they’re now much larger.
TC: Give us an idea of how the price range of rounds has changed.
JC: Over the last 18 months, the average Series A round [that we participated in] was $9 million, with the range being $5.5 million on the lower end and $16 million on the high end. The average Series B [we’ve joined] is now about $20 million, with the range being $10 million to $40-something million. When [the mobile marketing startup] Kahuna raised its gigantic [$45 million] Series B this summer, we wrote a [follow-on] check for $2 million. [Makes exaggerated, nervous expression.] It’s our single-largest investment ever, but I have faith in Kahuna.
TC: Are you getting liquid on any of your investments? Have you sold on the secondary market?
JC: We haven’t sold to a secondary buyer. When Eventbrite came to be valued at a billion dollars, I had the opportunity to sell some of our position and I didn’t because Eventbrite is a real business that generates a lot of revenue and I think it can justify and grow into its valuation.
I did sell a tiny, tiny bit of Fitbit when it went public. I thought the valuation was a great IPO valuation, but I think it can go higher.
TC: You invested alongside True in that deal. How much did you plug into Fitbit?
JC: We invested a total of $1.5 million across our second and third funds, and our position must be worth $200 million [or more], so it’s six or seven times the size of our [$15 million second fund] and two-point something the size of our [$55 million] third fund. [Editor’s note: SoftTech is currently investing a fourth, $85 million fund, two-thirds of which it has already put to work.]
We’re in lockup now, through December, and though we’ve had close to 50 exits, they’ve mostly been M&A. This is my first IPO. My mentor, Jon [Callaghan], has advised me against making the mistake of checking the stock price every day. [Laughs.]
It does change your perspective of how our industry works, though. When you don’t have a return like that, you wish you did. Once you do, you go, like, shit, that really works. It just takes one to make a fund.