Passionate Intensity
Exactly one year ago today, September 9, 2011, RTP Ventures officially got started. It’s been an amazing year, a whirlwind that seemingly parallels the experiences I’ve had at startups I’ve built — setting up basic operations, assembling a team, trying and testing business models and actually putting together a respectable portfolio of investments. Early successes, early disappointments, we’ve already had our share. But, overall, I think we’ve done pretty well for a fund that was an idea in someone’s head only a year ago.
Last September, there was nothing. No office, no website, no business cards, no name, and no reputation. RTP was a startup. All that has certainly changed. Building the infrastructure is least impressive, but necessary. It is hardly a point of pride, but, like the accounting procedures I ask my companies to set up, a necessary step. So, everything is there now and we, as a business, have gotten the basic workings of a fund down to a routine. Leads are processed, discussed, evaluated, and investments are made. Board meetings are regular, quarterly reports get written. The process is there. But I’ve done that before, and it wasn’t the fun part…
My biggest concern, as a new investor in 2011 was being taken seriously. Venture Capital is an insider-driven business which treats newcomers with skepticism. To be taken seriously and get a chance to invest in the better companies often takes years of reputation-building, track record management, and PR. We had no reputation, no track record save personal experiences in venture capital, and shunned PR like the good funds that don’t need PR should. We set off on a seemingly unusual theme for the times — no Social, Local, Mobile, but Data, Business, Infrastructure. We did not launch to glamor-spew on the VC talk circuit. We did not want to talk about how great our fund will be, but rather, with outward humility and inward confidence, knew it will be once we let the portfolio we put together speak for itself. We focused on building the best portfolio a new fund can build. Facts vs. pretense. And, I think, the facts are starting to speak
In the past 12 months, we made 11 investments. These investments included two seed stage investments and seven Series A deals. Importantly, we also did two later stage investments in Fab.com and RichRelevance. Ability to span the different stages of the VC funding timeline was an important thing I wanted to prove to myself. I did not want a portfolio of twenty early-stage seed deals one can find on Angel List. I wanted a mix of promising new companies and a few established winners. We now have no problem walking into even the largest investment opportunities and being treated with a degree of respect.
We have co-invested with some of the best VCs in the business: Greylock, Andreessen Horowitz, Atomico, Crosslink, Greycroft, and, my home-town favorite, IA Ventures. We co-invested “peacefully” without resorting to financial outrage, back-door deals, and exorbitant sums like other newcomer big-money international funds we know. We co-invested, we kept prices reasonable (no Series A closed above $10M post-money). I was personally interviewed several times by the partners in the established funds who wanted to see who these “new kids” were. And, happy to say it, I think we passed the test.
For our early-stage companies, we put together a support network that had one person I spoke to describe us as a “mini-Andreessen.” A compliment in my book. Personally, I have led three venture-backed startups. An never did any of my investors pay as much attention to me as RTP has to its early portfolio. Eight of the nine Series A investors use the same accountant, the same HR firm, which we helped provide. All know how to put together board decks, all have been given basic training on finance and marketing. God, how I dreaded going through this myself when starting my companies and how I wished someone would help me this way.
Our portfolio companies are friends and belong to a community. This is also something I never experience in the past. The other companies in my earlier investors’ portfolios seemed so aloof and full of themselves. I wanted this to be different. We have an amazingly active Yammer group where all the leadership from our companies (early and late stage) share thoughts, experiences, vendor recommendations, advice. I do weekly video calls with all the CEOs just to “chat” and do not treat is as a board meeting report. We have done one and two-day business modeling sessions with all the early stage companies to help our tech-heavy portfolio with some of the business tasks that are usually not their forte. The last monthly company dinner in San Francisco had 12 people attending — and there were no chest-pounding brag sessions. Just smart people getting to know each other.
More is coming. I would love to add more functions in-house and become a “macro-Andreessen” — an HR specialist, someone to help with legal, a recruiter, a PR person. But that takes a bigger fund and, trust me, we’ll get there.
More importantly, during the last year we kept our humility. RTP has no admins, no associates, no interns. No one gets to claim they are a VC unless they are really a VC. We schedule our own appointments, do our own due diligence, write our own reports and memos. The company’s first meeting is with me. I pass on companies that don’t fit on the spot, and, if it’s just a matter of fit (vs ineptitude) I offer to make introductions to other funds and actually do that. And for ones that we pass on after discussion, I send a detailed email explaining our thinking. No “we couldn’t get the partnership to agree bullshit.” No one here is allowed to be smug or feel self-important.
Last, but most important, this year could not have been possible without the continued support from our global parent fund, ru-Net. Leonid Boguslavsky and his firm took an investment risk on funding a group like us… and we appreciate it just like a startup appreciates an early investor. In a somewhat non-traditional arrangement, ru-Net is more than just a “sponsor” — they are our LP, one of our GPs, a source of expertise and advice. We have become, essentially, one investor as was hoped for all along. As we move forward in the coming months and start considering expanding the fund, they will always continue to play a key role in all we do.
Thank you to ru-Net and, first and foremost, to our portfolio companies. We are proud of you and your willingness to share a part of your bright future. We look forward to our second year together.
Quantity, quality, and size of early-stage seed financing has recently given rise to speculation about a seed funding bubble. Ex-founders, Hollywood personalities, the rich and the powerful, the smart and the cool, all seem to be foregoing or, at least, de-emphasizing the usual trappings of wealth (homes, cars, planes, baubles) and taking center stage at pep rallies preaching lean, capital-efficient startups poised to change the social fabric and consumer experiences, all for a few hundred thousand dollars invested. Money is available, some will say, easy to get. There are pitch sessions, pitch presentations, and a slew of incubators, accelerators, germinators that are ready to provide a cubicle and an internet connection in exchange for some equity. The process is quick and painless. I have witnessed angel investors flash their cash and write checks on stage. Founders who have never raised a real VC funding round have all been made to believe that the traditional funding process of overly lengthy, way too expensive, and, in general, unnecessary. Dropping out of college is suddenly cool, venture capital is stuffy and bad, and a big company can be built with almost no cash.
Early signs of trouble.
Many more companies that should not be funded are getting funded — micro-funded, to be exact. Founding teams lack critical mass (witness the “find a technical co-founder” craze) because instead of three guys with an idea and a prototype looking to build a company you have three distinct embryonic ideas looking for money, pitching a promise of hiring a top notch team that is nowhere to be found. Nowhere to be found because everyone who’s any good also has a company of his own to build. But these thoughts have been aired before and are now part of the usual rhetoric about the seed bubble. For me, the real danger started to manifest itself over the last couple of months as I saw some very good seed-funded companies looking to raise their Series A. These companies could have easily been winners, but, unfortunately, drank the wrong Kool Aid. I call these “ungerminated seeds.”
The real problem: little to show.
Ungerminated seeds are startups that raised a big seed round, often from prominent investors or VC funds, and have expectations and sense of entitlement that is completely out of proportion with what they’ve been able to accomplish using the money raised. The ideas are often good. The founders are often smart. But there’s trouble. I have spoken to a number of startups coming to the end of their $700K+ in seed funding. ”That’s a lot of money,” I said, “… and what do you have to show for it?” Often, the result is a beta launch, a team of hired guns, trickling early signups, some indication of traffic to the site. Maybe a pilot in early stages if it’s an enterprise company. To me, it feels like a Series A… but it’s not a Series A. The “cap” on the convertible note is often mistakenly seen as a post-money valuation (which it isn’t). There are egos (founders’ and investors’), there are appearances to be maintained.
The company seems to feel that burning through a million dollars of someone else’s cash entitles them to more cash from another group of investors. Founders, reality distorted, have expectations of valuations that make little sense to a professional investor because they are based on an implied seed valuation that should have been dubbed a “small Series A”. I am talking about good companies and good ideas, companies that could have traveled the normal Series A, B, C + IPO path that startups have taken for decades. Their early stage financial shenanigans make them, in my mind, un-fundable. Sad because if they had only taken less cash and not listened to the angels’ siren songs they would have been great Series A candidates.
This is not “sour grapes” from a small fund that can not afford to invest $10M in a Series A…. my fund certainly has the financial resources to do that. But, just having capital to deploy does not make you a drunken sailor that walks into a port of call ready to blow all his money and befriend the natives. There are responsibilities VCs have to their LPs — and one of them is not being stupid.
There’s nothing wrong with seed funding
However, there is absolutely nothing wrong with getting some early-stage money together to get a company off the ground. But founders need to be careful and make sure they are doing it right and are planning for the long-term financial success of their business. Some advice….
Before seed funding:
Look for professional organizations vs. individual angels. There are several smaller funds that make seed-stage investments. There are organized angel groups with screening committees consisting of industry experts. They are doing this because this is what they do, not because it’s some big VC fund partners’ experiment in ecosystem building or a bone thrown to a junior member of a VC team. There are funds I support, help, and ones to which I send promising early-stage investments. They are professional organizations managed by professional investors. They work very much like VC funds work (sometimes earning the label of micro-VC or super-angel funds). They manage their investments and the founders’ expectations. They prepare them for their next round and they make sure the company stays fundable. These funds are known. Drop me a line and I’ll give you a list of my favorites. Individual angels tend to be hobbyists. I am not talking about Ron Conway or Paul Graham — they are organizations, not individuals.
Raise just enough to show results. Avoid the piling on that is all too common these days. Don’t “leave room in the note” for people who want to join the round after learning that Ashton Kutcher is on board. The math that VCs do in their head is still the same. A dollar of post-money valuation should be worth about 3x in the next round. If you raise $1M in seed, assuming a normal 25% dilution, you are expected to have a company that is worth around $10M in about 18 months. $10M is a lot of money despite what you may think. Given that seed money is often used to experiment, the more money you raise the higher the expectations are for the experiments’ results. Saying “we did all this with $250K” sounds WAY better than “we only did this much with $1M”. Once you take big money, the meter is running.
Avoid big VCs with angel projects. Large VCs have started participating in seed funding frenzies. I saw one fund, on stage, talking up the advantage of taking seed money from them explaining that seed investments don’t need to go through the normal investment committee process and don’t require full partnership approval. Isn’t there a problem there? What happens in 18 months when a fund that typically writes $10M+ checks and requires all those approvals looks at your barely off the ground startup? It won’t be that easy. Signaling is an age-old problem with VCs. What will happen when the big VC that gave you $500K refuses to participate in your Series A? Think it will attract or repel investors? And, needless to say, there are issues with time commitments, prioritization, caring.
Look for accelerators with real infrastructure and industry support. There’s TechStars, there’s Y-Combinator, and a few others. All have a brand names, VC industry support, and professionals running the program. They do convertible notes, they do ask for a lot, they do put the companies through their paces, they are hard to get into. But all is done for a reason… to get the companies graduated and funded. I know that demo days sometimes feel like Hollywood productions. But there’s method to the madness. And those guys know what they are doing, certainly as far as financing is concerned.
After seed funding:
Pretend there’s a Board of Directors. Many seed-stage companies don’t have real boards. Some do, but many settle for loosely formed advisory committees. Either is fine, but there’s a real discipline that comes from being forced to give regular, structured updates on your progress to a small group of people that know what they are doing and who see these updates month after month. Get into the habit of having regularly scheduled meetings with several investors at once. Yes, in person. Yes in a conference room. Yes, with slides, reports, and financials. It will put what you are doing into the right perspective. Run through decks, introduce the teams, air your grievances, ask for help. This is another argument for professional funds vs. individual angels. These funds care enough about you and your company to devote the time and effort that’s needed.
Talk about the next round ASAP. As soon as the seed funding is closed, start thinking about the Series A. Immediately. Have a good understanding of when it’s going to happen, when you need to start raising more money, and what the required milestones need to be. Adjust and maneuver to hit dates. Expect to be chastised for missing them. Yes, your goal may be to find product-market fit, or to build something wonderful and exciting. All will be for naught if you can’t get more money. So, that’s the real goal. Good accelerators and professional early investors know this very well. There’s a reason TechStars companies prep for “demo day” the moment they land in the program’s city of choice. You should be prepping for your demo days as soon as the first checks hit the bank.
Focus on one simple goal. There’s a Russian saying: ”if you chase two rabbits, you won’t catch either one.” Figure out what the one KPI the company will obsess about and watch it like a hawk. If it’s user signups, if it’s conversion, if it’s enterprise pilots, if it’s a set of features that blows everyone’s mind… decide and focus. Don’t chase too many rabbits and experiment too much. You need to be able to show improvements in the chose KPI over time, and time is scarce.
Going for Series A:
Focus on how much you were able to get done with limited resources. This is what seed rounds are all about. It’s not about slick presentations and SXSW parties. It’s not about how much you tweet or what your friends re-blog. It’s about being frugal and getting a lot done with little money. If you raised a big seed round, you’re expected to produce some big results. If you don’t have big results, there will be trouble. You should focus on how far you’ve stretched the $250K you got, how much progress you’ve made, or how long it’s lasted. The thought you want the VC to have is “wow, if this is what they can build with $250K, imagine if they had $5M!” vs. ”well, they did zero with $1M, and now with $5M more, zero times zero is still zero.”
Keep seed VC expectations under control. If you took money from VCs in your seed, don’t expect them to participate in a Series A. This sounds terrible, but that’s a fact… and a reason to avoid seed money from VCs. This can easily be explained if your Series A round is still below the dollar amount your seeding VC likes, but if it’s in their comfort zone and in their core area of focus, be sure you have a story. And be sure that story will be corroborated by the VC because he will definitely get a phone call about it.
Drop the “entitlement” posture. Just because you raised money, doesn’t mean someone is obligated to keep funding you. The bar is significantly higher once you’re funded and no one owes you a step up in valuation that you did not earn. Your cap is not a valuation and no one actually “valued” you yet. And the exit is still a distant promise.
RTP VENTURES announced its existence on September 6, 2011 on this blog. I did not want to do a press release, talk about nebulous market trends, or brag about our fund’s raised capital as is often done by venture firms looking to make a big splash. I always wanted and will continue to insist that our actions should speak louder than our words. I felt that theme, investment stage, geography can be understood by looking at the companies in which a fund invests. Whenever I try to understand what a fund is all about, I usually start with the “portfolio” page and look for companies I recognize, then look at the “team” page and see what the partners are all about. So… I wanted to wait and gather a few data points.
Sixty days passed, and I have been gathering the data instead of blogging about it. Here are the facts. Over the last 60 days I met with 48 companies in various parts of the country. Some facts about them….
- 23 were in the Bay Area (which entailed two week-long trips to SF), 19 in New York, the rest elsewhere
- 15 were Seed investments, 21 were Series A, 10 were Series B, and two were Series C
- I passed on 21 of the companies, 3 were put on the “watch” list, and 18 companies are still in the running. We “lost” 2 investments.
- I am happy to say, we made 4 investments (in chronological order):
Tinfoil Security: a security as a service solution for small businesses that enables them to monitor their web sites for ever-changing ways in which those sites can be hacked, damaged, and compromised. The company is led by a smart and tech-savvy team, and we are joined by a group of great investors including IDG Ventures, and on of my TechStars pals, David Tisch. Tinfoil was a seed investment. Though without a formal board of directors, I plan to actively work with the company and intend to support them in their next financing.
Koding: a cloud-based development environment that lets programmers create applications in PHP, Ruby, Python, and JavaScript completely in their browser. The company has a strong 30K+ following of active users, and was started by a passionate team (two brothers) whom I have gotten to know over the past year. Koding will change the way engineering teams work and be an invaluable tool that cloud providers will use as an on-ramp for the people actually building applications on their infrastructure. We led this Series A investment, joined by my friends and colleagues at Greycroft Partners. I am a member of the company’s board of directors.
CakeHealth: I saw CakeHealth at TechCrunch in San Francisco and knew I needed to make an investment. They should have won, vs. being runner-up. Though I often talk down “consumer” plays, I loved this one. You can think of CakeHealth as the mint.com + Expensify for your healthcare bills. They ingest the bills you receive from your health provider, correlate it to the statements from an insurance company, and finally let a consumer understand the arcane nomenclature and cost structure of all those notices he gets in the mail. Being married to a doctor and having her sister (also a doctor) as my primary care physician, I personally have an easy way of dealing with the problem — I hand the bills to them and forget. Most consumers, most families do not have this luxury. CakeHealth will help the consumer take steps toward taking control and optimizing their own medical plans. CakeHealth was a seed investment in which we were joined by a number of great angel investors as well as Menlo Ventures and Charles River Ventures. Again, without a formal board, I plan to work actively with the team and get them ready for their next financing.
GridGain: GridGain is a company that creates software for managing high-performance, dynamically scalable compute grids. The company’s founders are advancing the state of the art in defining the next generation of grid computing. Their impressive list of early customers includes amazing brand names in the finance industry from New York, London, Paris, and Tokyo. Applicable to any demanding computational tasks, they also managed to secure business from a well-known personal computer, tablet, and phone manufacturer in Cupertino. What GridGain is doing is technical and complex. The team is smart and focused. We led a Series A investment in the company. I am a member of the company’s board of directors.
So, that’s it for the first sixty days.
Oh, I also opened an office in mid-town Manhattan, got the fund set up with the right bankers and lawyers, started working on a real web site, started interviewing additional team members, etc. I met with many of the VCs I hope to work with (and am planning on meeting more). I sat on a few panels, and had about 10 additional meetings each week just trying to help entrepreneurs. It’s just like a startup… but that’s so familiar to me.
And that’s why I haven’t had time to blog.
I am in San Francisco again, and then to the DeFrag 2011 conference in Denver.
Deal flow, even with a one-man firm, is not a problem.
About Me
I am the Managing Director of RTP Ventures, the U.S. operation of a $700M+ international Venture Capital fund. I was also a Venture Partner at Greycroft. I am a three-time founder and CEO of software companies including Plumtree Software and Elastra. Spent most of my life working on databases and working with VCs. Finally bit the bullet and joined one. Ready for something new. Passionate and intense about Software and New York City. (I know where the title comes from, and... the falcon can not hear the falconer)
