At the beginning of the year, super investors Ron Conway and Yuri Milner created the controversial Start Fund to invest in every new Y Combinator startup. They offered each YC startup to graduate from Paul Graham’s rigorous selection process $150,000 in an uncapped convertible note with no discount. Some venture capitalists didn’t like the precedent this set. But at least one more big one, Andreessen Horowitz, is jumping on board and joining the Start Fund.
Going forward, Andreessen Horowitz will contribute $50,000 of that $150,000 to each YC startup that chooses to take the deal (and so far, most of them have). “It will start with the next cycle,” Marc Andreessen tells me. With more than 60 startups per class and growing that comes to $3 million in commitments per class for each of the three investment partners in the Start Fund. → Read More
There may or may not be a cash crunch in Silicon Valley, but if you are Vinod Khosla you don’t have to worry about it. His venture firm Khosla Ventures just closed a new $1 billion fund (Khosla Ventures IV), which we first reported was in the works last May. (He raised $1.05 billion, to be exact). His portfolio is half cleantech and half Internet/mobile, and he plans on keeping it that way.
Top tier firms like Khosla Ventures have the luxury of raising huge funds. The limited partners who invest in venture funds are narrowing their investments to the top 20 percent of firms who produce nearly all the profits. “We have generated close to $1 billion in profits,” Khosla tells me, referring to the returns across all of his funds so far. It was only two years ago that he raised $1.1 billion for Khosla Ventures III and a smaller seed fund. “Third-tier VCs are not getting funded,” he notes. “The number of active VCs is actually going down.” → Read More
Everybody knows that when you raise money at a startup your ownership percentage of the company goes down. The goal is to have the value of the startup go up by enough that you own a smaller percentage of a much larger business and therefore your total personal value goes up.
The simplest way to think about this is: If you own 20% of a $2 million company your stake is worth $400,000. If you raise a new round of venture capital (say $2.5 million at a $7.5 million pre-money valuation, which is a $10 million post-money) you get diluted by 25% (2.5m / 10m). So you own 15% of the new company but that 15% is now worth $1.5 million or a gain of $1.1 million.
But understanding how you’re likely to get diluted over time is a more difficult concept. And figuring out how much your equity may be worth over the course of a 5-year stint at a startup is even more complicated. (Infographic after the jump) → Read More
Today at TechCrunch Disrupt, five VCs gathered to talk about the state of investing in Silicon Valley and what skills and qualities make a successful venture capitalist. James Slavet of Greylock, Joe Kraus of Google Ventures, Shervin Pishevar of Menlo Ventures, George Zachary of Charles River Ventures, and Rich Wong of Accel Partners each weighed in on how venture capitalists are trying to make a difference in the lives of startups as well as what the perception of venture capitalists has been traditionally and how that’s changing. → Read More
Editor’s note: Jules Maltz is a General Partner at Institutional Venture Partners (IVP), a late-stage venture capital firm based in Menlo Park. You can follow him on Twitter @julesmaltz.
Whenever I’m about to make a new investment, I always think about the 2×2 matrix I learned from Andy Rachleff, a former partner at Benchmark Capital.
The idea is that if you make a new venture investment (or start a company), you can either be “right” or “wrong” and you can either be “consensus” (following the crowd) or “non-consensus.” Everyone knows that if you’re wrong, you’re not making any money. But the interesting part of the chart above is that being right and consensus isn’t great for your returns either. The big money, as any horse racing handicapper can tell you, comes when you’re right and you don’t follow the crowd. → Read More
Series A financings are on the decline. They peaked at 283 in 2007 and are on pace to barely crack 100[1] this year (all data is from CrunchBase through the end of June—it is imperfect but the best I’ve got, see chart). They’ve also declined in relative terms, representing nearly 40% of all equity financings in 2006, and less than 20% year to date. I believe there are two main reasons for this: 1) the rise of the Series Seed and 2) the ho-hum exit environment since 2008.
That’s why a Business Insider article on Monday titled Venture Capital: No Longer a Business of Small Investments in Early Stage Companies inspired me to dig into the data and see for myself what was going on. VCs are less inclined to lead or participate in follow-on rounds unless the company is a clear winner in its class. Furthermore, VCs have had to support their perceived winners longer because exits have been fewer and farther between. Even with the rise of the Series Seed (the nomenclature of which is not used uniformly), Seed and Series A deals collectively accounted for nearly half of all equity financings in 2006, and now account for less than one third. → Read More
Dow Jones VentureSource released its second quarter numbers for the venture industry today, and there’s a reason they’re not dominating the headlines. They’re pretty boring: Overall investors put $8 billion into 776 deals in the US in the second quarter, a decrease of 5% in terms of invested cash and 2% in terms of deals. The median amount raised per deal was $5.2 million, up from $4.6 million a full year earlier. Yawn, right?
But the fact that the numbers are so unremarkable is what makes them interesting. It reinforces what people like me have been arguing for months: A handful of hot companies does not a bubble make. → Read More
One of my favorite recent blog posts is Seth Godin’s “Getting funded is not the same as succeeding.” Whether or not we’re in a bubble, it’s a sign of the times that this post has to be written in the first place. As Josh Elman tweets, we’ve gone from RIP Good Times to funding a grilled cheese company in less than three years (Sequoia was involved in both interestingly). Instead of focusing on the companies that are creating the most value for their customers, we’re talking about who raised the largest round or who’s part of the billion dollar valuation club.
And this is dangerous. It’s dangerous because we’re celebrating the “success” of fund raisings rather than the success of building truly valuable businesses. → Read More
It seems that Venture investors are none-too-happy with current IPO activity. According to a study sponsored by Deloitte and the National Venture Capital Association released yesterday, over 80 percent of venture capitalists from around the globe believe “that current IPO activity levels in their home countries are too low”. Low enough, in fact, that it has investors worrying over whether or not it can sustain the venture capital industry.
While it seems that investors and VCs tend not to agree on anything (ever?) and it’s thus a bit surprising to see 87 percent of U.S. investors agreeing that IPO activity is too low, it’s also important to keep in mind that this survey was given to investors in the spring. This was before Pandora and LinkedIn went public and bubbletalk was on the tip of everyone’s tongue; in fact, 2011 seems to be a pretty good year for IPOs and investors are encouraging startups to raise. (Before a potential bubble burst, of course.) So then, perhaps VCs should consider IPO rehab for their addictions? What do you think? → Read More
Over the years I’ve heard many legitimate gripes from entrepreneurs about the way venture capital firms treat them while fundraising. I must confess an imperfect record of courtesy myself, though I do try to be respectful, and to incorporate feedback. For example, I once resolved never to keep entrepreneurs waiting long for me in our lobby, and I think I live up to that.
But I often hear one particular gripe from those who simply fail to think through the issue practically: For their first pitch to a large venture capital firm, entrepreneurs are often invited to speak or meet with someone other than a partner of the firm. Some interpret this as an insult, a waste of time, and a lack of substantive interest in their startups. And they are partially right. → Read More
Any seasoned investor knows that past performance is not indicative of future returns. That is as true with public stocks as it is with venture capital firms. But if someone were to ask you to rank the top VC firms today based on their probability of success, how would you do it? Remember, looking at past returns won’t help you.
Chris Farmer, a VC at General Catalyst Partners, has come up with a method which he calls InvestorRank. Just as Google’s PageRank orders search results based on how many links each page gets from other sites, InvestorRank looks at the connections between VC firms. Whenever two VC firms co-invest in the same deal, that creates a bond between them. If one VC firm follows another one in a later round, that boosts the rank of the earlier investor. → Read More
On Thursday, Raj Atluru announced that he was stepping down as a managing director with Draper Fisher Jurvetson, where he served as a key cleantech investor since 2001. He will join a private equity group that invests in later-stage clean energy companies, Silver Lake Kraftwerk, which was formed earlier in 2011 by Silver Lake Partners and Soros Fund Management, led by Adam Grosser.
Atluru took board positions at six of DFJ’s cleantech portfolio companies and will maintain seats on some of these, according to a managing director at DFJ in Menlo Park, Josh Stein. He also noted… → Read More
U.S. venture capital firms raised more money last quarter than in any period since 2001. The total raised for new funds was $7.7 billion, according to Dow Jones LP Source. The capital going into VC funds was up 97 percent from a year ago, when they raised $3.9 billion. (Venture capital funds benefited from an overall influx of money into U.S. private equity funds overall, which attracted a total of $31.6 billion in the quarter, up from $13.5 billion a year ago).
Institutional investors and limited partners are putting more money into ventre capital, but are concentrating their bets in fewer, higher-quality funds. The money from limited partners, however, was not spread willy-nilly. Only 25 funds tracked by Dow Jones were able to raise money, the smallest number since 2003. → Read More
I guess $1 billion under management just wasn’t enough. Andreessen Horowitz has just announced a new growth fund of $200 million. The fund with co-invest alongside the firm’s most recent $650 million fund, providing more capital for the kinds of late stage deals that have been raging in the Valley of late. (Check out our three part series on the trend here, here and here.)
That “co-invest” part is makes this announcement very different from other firms’ late stage funds, says general partner John O’Farrell. “This is not Fund III. This is a completely discretionary fund that gives us more firepower to invest in great high-quality, high-growth companies along with Fund II, but there is no obligation to do so,” he says. In other words, the firm may invest all of the $200 million, none of it or somewhere in between. At the end of Fund II, it goes away no matter how much is left.
And this may be the biggest distinction from other growth funds: Andressen Horowitz is not charging investors any management fees associated with this fund. → Read More
(Editor’s note: This is the third installment in a series about the late stage, secondary investing craze sweeping the venture capital business. For the first two installments go here and here.)
On May 26, 2009 Mike sat down with Yuri Milner, Mark Zuckerberg and a Flipcam to talk about the then-scandalous $200 million investment DST made in Facebook, at a price that valued the company at about $10 billion. The camera-work is Blair-Witch-Project-like at best. You can barely hear the audio, and Zuckerberg can’t for the life of him figure out whether to look at the camera or Mike. It doesn’t really matter because, just after he asks, Mike proceeds to cut off half his face anyway.
But shoddy production aside, this may have been one of the most pivotal moments TechCrunch has ever captured on camera.
We didn’t know it at the time, but this was something more than an unexpected investment by an unheard of investor in a seemingly overhyped social network. It was a moment we’d been waiting for for more than a decade. Something we’d been obsessing about. It was the moment when a Web startup fundamentally broke all the normal rules of gravity that govern all Web startups. It was the moment that would eventually spawn a new, unchartered frenzy of late stage dealmaking. In my opinion, it was nothing short of the Web 2.0 generation’s answer to “the Netscape moment.” → Read More
Editor’s Note: This is a guest post by Mark Suster (@msuster), a 2x entrepreneur, now VC at GRP Partners. Read more about Suster at Bothsidesofthetable
I’m a very big proponent of the “lean startup movement” as espoused by Steve Blank & Eric Ries. The part of the movement that resonates the most with me is that entrepreneurs should keep their capital expenditures really low while they’re experimenting with their product and determining whether there is a large market for what they do.
In the late 90′s I saw a dangerous trend creeping into the startup world, which was that companies were suddenly raising huge amounts of money too early in their existence. It seemed to be purely speculative. It’s not clear that there was big customer demand for some of these products yet entrepreneurs were egged on by VCs to “take the money” and try and push the market.
Here’s what those VCs (and us entrepreneurs, myself included) didn’t understand: 9 women can’t make a baby in a month. Here’s why … → Read More
Editor’s Note: This is part two in an in-depth series exploring the ramifications of the explosion of late stage capital being raised by the Valley’s elite venture firms. For part one, go here.
In the mid-2000s when nearly every top venture capital firm was expanding to India and China, Benchmark Capital did not share its peers’ worldly ambitions. In fact, while the firm retained its Israel fund (for now?), it spun off the top performing UK fund Balderton Capital and retrained its focus firmly on the US.
Earlier this year, when early stage investors were losing deals at the hands of the super angels and firm-after-firm launched aggressive seed investing programs, Benchmark Capital did not. It refused to compete with the Ron Conways and Mike Maples of the world; it would wait its turn and invest later.
And now – as Benchmark’s early stage peers are raising $1 billion growth funds and throwing huge sums of money at established companies like Facebook, Zynga and Groupon – once again, Benchmark Capital is refusing to follow suit. → Read More
In Silicon Valley it’s not just who you invest in that matters– it’s also when you invest in them. The earlier the investment, the riskier the bet. But the more jawdropping the returns if the company hits it big. It’s so lopsided, that typically just 5% of those unsure early bets create some 95% of the entire venture industry’s returns. Miss one of them, and it haunts you for years. Snag it, and you can brag for even longer. This simple reality is precisely what makes the venture business hard, and the justification for why partners make such huge fees.
So what’s up with the surge of the strongest early stage firms jumping so heavily into late stage mega-deal fray? Have the Valley’s superstars lost sight of these rules or are the rules changing?
Earlier this year, we wrote a lot about the shift in power at the early stages with the rise of super angels, but you could argue there are far greater ripple effects to this new late stage frenzy. That’s not only true for the Valley, it’s true for the stock market. And you could argue, those ripple effects are less well-understood. → Read More
Angel investor and entrepreneur Craig Shapiro is starting a new seed fund based in Los Angeles with the help of friends and advisors like YouTube founder Chad Hurley and Kiva co-founder and Profounder CEO Jessica Jackley. Investors in the relatively small $6 million fund include GM O’Connell, Nicholas Negroponte, Jason Krikorian (co-founder of Sling Media), Ben Goldhirsh (founder of Good and heir to the Inc. magazine fortune), and Brendan Synnot (founder of Bear Naked and RevelryBrands)
Called the Collaborative Fund, it will invest in startups focused on two themes: collaborative consumption and those which use their values as a competitive weapon. → Read More
A lot of venture capitalists and super angels are not only active investors, but also active bloggers. Below is a list of the top 20 VC power bloggers as compiled by Larry Cheng of Volition Capital based on traffic data from Compete. The metric being used here is average monthly unique visitors during the fourth quarter of 2010.
Compared to last year’s list, there’s been a big shakeup in the VC blogging world. Paul Graham of Y Combinator took the top spot, pushing Fred Wilson of Union Square Ventures to No. 2. And four new names appear in the top ten, including Chris Dixon (Founder Collective), Ben Horowitz (Andreessen Horowitz), Charlie O’Donnell (First Round Capital), and Larry Cheng himself. They pushed down Bill Gurley (Benchmark), Josh Kopelman (First Round), Bijan Sabet (Spark)—who are all still in the top 20—and Guy Kawasaki (who was pulled off the list because he is not as active as a VC anymore). → Read More
San Francisco, CA
