David H. Beisel
Entrepreneur.
Venture Investor.
Runner.
Skier.
Husband.
Friend.
My LinkedIn- My Twitter Stream
- My Facebook
- GenuineVC - David Beisel
- Contact
-
Info
- Seed-Stage Internet Investor & EntrepreneurVenture Capital & Private Equity | Greater Boston Area, USSummary
I am a cofounder and Partner at NextView Ventures, a seed stage venture capital investment firm focused on internet-enabled innovation. My focus is to work with founding entrepreneurs seeking expertise and a seed round of institutional capital, with the aim of together building great digital media & internet companies. We at NextView currently have a broad portfolio of consumer web, mobile, SaaS, and enabling-layer internet startups.
I also am founder and organizer of the Web Innovators Group, an organization which holds quarterly events which bring together nearly a thousand people in the web and mobile entrepreneurial ecosystem. I currently serve on the Board of Directors for BlogHer, a women’s-focused blogging community and media network. In addition, I actively blog at GenuineVC.com.
Prior to NextView, I was a Vice President at Venrock, an early stage VC firm originally established as the venture capital arm of the Rockefeller family. While at Venrock, I served on the boards of portfolio investments Gazelle (fka Second Rotation) and BlogHer, and was actively involved with the firm’s investment in Appnexus. Previously I served as a Principal at Masthead Venture Partners where I helped lead an investment in Expo TV, and was an integral member of the team for our investments in Tremor Media and NewsGator.
Prior to joining Masthead, I co-founded Sombasa Media, an e-mail marketing company best known for its flagship property BargainDog.com, which I grew to 5M registered members. Sombasa was successfully acquired by About.com, which was soon after acquired by Primedia (NYSE: PRM), where I served as Vice President of Marketing.
My educational background includes an MBA from the Stanford Graduate School of Business and an AB in Economics, magna cum laude and Phi Beta Kappa, from Duke University.
Specialties: Internet, digital media, online marketing, digital imaging, ad tech, seed capital, e-commerce, marketplaces, early-stage venture capital, consumer software.Experience- Jul 2010 - PresentCo-Founder & Partner / NextView Ventures
Seed stage investment firm focused on internet-enabled innovation.
- Jun 2007 - PresentBoard Director / BlogHer
Investor in and Board Director for BlogHer - the leading participatory news, entertainment and information network for women online, reaching more than 21 million women each month via annual conferences, a Web hub (http://www.blogher.com), and an publishing network of more than 2,500 qualified, contextually targeted blog affiliates (http://blogherads.com).
- 2004 - PresentFounder and Organizer / Web Innovators Group
Started and lead professional networking organization, the Web Innovators Group (aka "WebInno"). We are entrepreneurs, developers, creatives, startup geeks, and technology executives – all inspired by web and mobile innovation. Each quarter nearly 1000 people from our community gather to see the latest startups demo their services, as well as for everyone to share and exchange new ideas.
- Sept 2007 - Jun 2010Board Director / Gazelle (fka Second Rotation)
Led Series A venture round and served as Board Director for Gazelle (www.gazelle.com) - the nation's leading high-end consumer electronics trade-in site, providing an easy, fast and safe way for consumers to get cash for their unwanted devices
- May 2007 - Jun 2010Vice President / Venrock
Engaged with early-stage entrepreneurs looking for additional capital and expertise to help build digital media companies. Originally established as the venture capital arm of the Rockefeller family, Venrock is a premier venture capital firm with offices in Palo Alto, CA; New York, NY; and Cambridge, MA.
- 2004 - Apr 2007Principal / Masthead Venture Partners
- 1999 - 2001Co-Founder; VP Marketing / Sombasa Media / About.com / Primedia
Co-founded consumer-facing e-mail marketing company, Sombasa Media, which was which was successfully sold to About.com and then subsequently transformed into the About Direct division of Primedia (NYSE: PRM). Led the marketing team responsible for the company's e-mail newsletter product suite growing its flagship BargainDog.com property to 5M registered members, managed the division's customer relationship operations, and coordinated related business development activities.
- 1998 - 1999Associate / Parthenon Group
Education-
2002 - 2004Stanford University Graduate School of BusinessMBA
-
1994 - 1998Duke UniversityAB in Economics
Additional Information-
Websites:
-
Interests:Skiing, cycling, running.
-
Tweets
- Venture capital misconceptions, half-truths, and lies: http://t.co/A4BWWo6Gzq
- [New blog post] Myth Busters: Debunking Seven Conventional Wisdom Maxims of Venture Capital http://t.co/A4BWWo6Gzq
- Effectiveness trumps confusion MT @eMarketer REPORT:“Native Advertising: An Emerging Consensus for a New Kind of Ad” http://t.co/YD4lWMFri9
- Why first-mover startups don't always win: http://t.co/Who4tC4xFF
- Kauffman study says 20 tech co's founded each year which will reach $100M+ in revenue... only 20% of them in Cali http://t.co/0ILIt9ISnY
- Oh, hello Twitter. I haven't seen you in a week... did anyone say anything while I was away?
- Congrats to my partner @RobGo MT @BostInno: The Best in Boston: Spark, Bessemer, NextView Bring Home VC Awards http://t.co/AR7HMKISgo
- At the @NewEnglandVC #Nevys13 with @changds and the rest of the Boston startup community http://t.co/C43SpDLM0n
- Solid read: @adexchanger - "The Great Mobile Ad Compression" http://t.co/Y2Md6V5F9x
- White-paper from @IAB: few local businesses do even basic work on online listings despite frequent consumer views http://t.co/e6EtRDehnM
- Some VCs merely view term sheets as “marketing documents" http://t.co/R0MWHY5Glf
- [New Blog Post:] "Driving to Conviction (Not to a Term Sheet)" http://t.co/R0MWHY5Glf
- Less than one week away from the NEVY Awards! http://t.co/RPFFQAnjrT @newenglandvc's celebration of Boston's startup community
- Adweek: Laying the Groundwork for Visual Advertising http://t.co/WnGOR9h91y Half the pixels on the Internet are black boxes to ad targeters
- Android is literally taking over the world... plans to go from one to two BILLION devices: http://t.co/OiX7QrB57l
- Just opened up registration for the next WebInno event, now scheduled on June 24th: http://t.co/iUNXofM9HK. More details soon.
- MT @ScottKirsner: Map of startups that have traded Cambridge for Boston: http://t.co/zWBYREM9NO -> Includes @OBJL @Shareaholic @NextViewVC
- Pointlessness of Premium Debates by @atompsett http://t.co/NWWzsP9UQR "People confusing t/ way media is accessed w/ t/ underlying inventory"
- Quick new blog post this morning: "Startups Seeking Sherpas" http://t.co/1Wrw7w6xa7
-
Posts
- May 20, 13
Compared to most other areas of finance, venture capital is practiced as more of an art, as opposed to a science. For that reason, it’s often said that VCs learn the business best through an apprenticeship model, under the wing of a more experienced pro. The art of venture capital also means that for entrepreneurs raising it, there isn’t one definitive playbook which can be used as a guide. Rather, over time, a series of collective experiences has solidified into a set of conventional wisdom which is shared repeatedly. Many common rules of the thumb are absolutely true (maximize the outcome of a fundraising process by approaching many firms simultaneously; deals should accelerate towards a close), but there are a handful of ones which just aren’t so:
MYTH: Entrepreneurs need a “warm introduction” to a venture capitalist to get a meeting.
REALITY: A warm introduction is neither necessary nor sufficient to get a meeting with a VC. What really matters is getting a VC’s attention. A truly “strong trusted endorsement” will do so, but that’s much harder to obtain than just a warm introduction. Otherwise, what I’d call a “credible introduction” is sufficient provided there’s also an additional piece of information (key founder background, specific space, etc.) It doesn’t matter how well the referrer is known, how “warm” it is, as long as it’s credible. The exception is if the referral is coming from a trusted inner circle and it’s a meaningful recommendation, not just an intro.MYTH: VC’s need 20% ownership in their investments to make money.
REALITY: VC ownership targets depend on many factors and aren’t set in stone. The myth has been discussed and discredited in blogs for years, yet it continues to persist. And it manifests itself in pernicious ways. To make money, VCs should aim to have meaningful target ownership in their portfolio investments, but 20% is by no means some kind of magic number. The impact of a single investment on a fund depends on ownership percentage, as well as the fund size and the portfolio size (i.e. number of investments). A larger fund will want to have larger ownership targets than a smaller one for any given exit outcome to make an impact (… even larger than 20% for mega-funds). A seed fund with fewer investments will require smaller ownership than one with a broad portfolio to make the same impact. Entrepreneurs should remember that while these targets are real, they’re just that – targets. VCs who swear publicly that they’ll never make an investment with less than 20% ownership show up on cap tables in the teens… the 20% pronouncements are just posturing for negotiation.MYTH: Goal of entrepreneur’s VC fundraising is a term sheet.
REALITY: Goal of an entrepreneur’s VC fundraising should be a closed investment, which includes both partnership conviction and an agreement of key terms. My recent blog post digs into these details.MYTH: Venture capitalists are looking to replace founders with “their guys.”
REALITY: The earlier-stage an investment is for a venture firm, the more the bet is on the team, the more reticent they are to want to change the core DNA of the company. (The caveat here is for later-stage venture investments, the Founder/CEO role is sometimes seen by investors as a hired role which is currently being held by someone who has been there since inception but doesn’t need to persist indefinitely.) However, any early stage venture capitalist knows that many of the most transformative companies (read: profitable investments) in history are those which are founder-led throughout. At the early stages, the primary investment thesis rests on the team, rather than the idea or market (which are less unique and more easily fungible). When a VC backs a founding team, she’s doing just that, backing a founding team.MYTHS: VCs add no value -or- VCs add indispensable value.
REALITY: Common polar viewpoints of either venture capitalists being literally useless beyond the cash they invest or VCs solely transforming their portfolio companies are vastly exaggerated – the truth is always somewhere in between. Even the most elementary venture capitalist has the privilege of serving on boards of a number of startups. That set of experiences alone provides a unique perspective about companies facing similar challenges which adds constructive diversity to board room discussions. More importantly, a handful of VCs are indeed truly engaged supportive partners with entrepreneurs in building their businesses. They contribute in ways from opening their personal networks to providing counsel during important strategic decisions. But hyperbolized claims about “platform offerings” replacing key team functions or the ultimate success of a startup hinging on an individual VC’s contributions are vastly overstated.MYTH: Entrepreneurs should avoid larger VCs in seed rounds because of “signaling risk.”
REALITY: Larger VCs in seed rounds do indeed alter dynamics of future financings, but not always for the worse. Although the negative signal potential of a larger VC which participated in a seed round not continuing forward can damage the prospects of raising a subsequent round, there are both benefits to their participation and ways to mitigate those effects. A recent CB Insight study concluded that the highest follow-on rate occurred when BOTH a multi-stage VC AND seed VC participated in a seed round.MYTH: The venture capital model is broken.
REALITY: Venture capital is a business driven by asymmetric outcomes and therefore asymmetric winners. People are accustomed to normal distributions, as they’re both intuitive and commonplace. Along many dimensions, the structure of venture capital is anything but normally distributed. Most entrepreneurs who seek venture financing don’t receive it, yet for the ones who do there is immense competition from multiple sources vying to invest. Most entrepreneurs who raise venture aren’t successful, yet those who are, are wildly. Typically one to three of these winners within a VC’s portfolio significantly drive overall fund returns, not the median investment set. And those winners aren’t normally distributed across firms and funds, so as an “asset class” VC performs poorly. But within the space, there are entrepreneurs, VCs, and LPs who all benefit… just not on average. Rather, the distribution of everything in VC is asymmetric, not broken. - Apr 29, 13
Posts in the blogosphere, conversation on panels of/about VCs, etc. all talk about the best way for entrepreneurs to optimize their fundraising process with the end-goal of receiving a term sheet. It’s often spoken as if the second that magical term sheet document is in hand, the process is over. Unfortunately, that’s an oversimplification which should be recognized by savvy entrepreneurs.
The goal of any VC fundraising process is in reality a bit more nuanced, as there are two key events an entrepreneur should be working towards:
- Partnership Conviction – having not just the sponsoring partner at a VC firm, but the entirety of the firm’s partnership, on board with the investment.
- Agreement of key terms between entrepreneur + VC firm. A meeting of the minds about the key components of an agreement (structure, valuation, key features).
Most often a signed term sheet entirely recognizes these two events (hence the simplification), but in many cases term sheets are issued before either or both of the above are present.
How can this situation happen?
- Some VCs merely view term sheets as “marketing documents.” Given that it’s a non-binding piece of paper, it’s relatively easy to share one and appear to be further along the process of conviction and agreement than is really the case. This situation can even sometimes lure entrepreneurs into abbreviating their full fundraising process to vie for competitive offers. It doesn’t mean that the term sheet is without merit, but just that the process of conviction and agreement needs to catch up to the documentation.
- Many times (seed) investments (especially) don’t have true partnership conviction. Depending on a partners position in the firm and the size of the potential investment, there is typically some ability to issue term sheets (and even write checks in seed rounds) before the whole team is on board. In those cases, the propensity for time to kill all deals for this round and starting the race for the next round of financing can start behind the starting blocks with the VC firm of current investors not completely bought in.
- Entrepreneurs pushing for a term sheet from one firm to use in leverage with other firm’s negotiation. Again, it goes back to if there is really belief behind the document on either/both ends. This approach is a high risk/reward strategy… which can work, but can also fall like a house of cards if the ultimate agreement on either side is based on fear of losing the deal, not excitement about winning it.
- Term sheet is an opening in a negotiation rather than the codification of it. Sometimes term sheet negotiation processes play out with multiple term sheets being shared to reflect the current state of discussions until one is signed, instead of just one final one reflecting the ultimate agreement.
Different firms have different perspectives on term sheets. I know some firms who won’t share a term sheet unless they believe there is complete agreement understanding in place with an entrepreneur and s/he is ready to sign immediately. Others I know view it as a fruitful way to open a dialog with items outlined in black and white as a foundation. The key takeaway is for entrepreneurs to initiate a conversation during the middle of the fundraising process with a potential VC partner to learn their philosophy on sharing term sheets and then understanding the context when one arrives (or doesn’t arrive) in an email inbox.
- Apr 04, 13
After we sold our startup Sombasa Media just over a dozen years ago, I embarked on two distinct “journeys.” The first was a month-long 1500+ mile cycling trip from the southern tip of England to the northern tip of Scotland (“Land’s End to John O’Groats”). The second was a trip where we hiked the “Inca Trail” in Peru to Machu Picchu. Both trips “rhymed” with each other in that the point intentionally was about the experience of the voyage rather than merely the destination itself. I think that the reason founders are attracted to entrepreneurial endeavors often stems from the same intrinsic motivations. It’s not fully about the eventual outcome or exit of the business (— yes, of course that matters), rather the process of creating something out of nothing and building a meaningful endeavor.
There are many differences between the two trips which I took, including that the cycling trip was a solo endeavor and the hike was a group one. But this isn’t an analogizing blog post about having “co-founders.” It’s one about having a sherpa. Obviously, I don’t mean literally a cultural Sherpa… but instead a sherpa who is a largely silent but proactive guide providing support along the journey.
Yes, my analogy description of a sherpa very much sounds like a mentor. But I think that there are subtle distinctions:
- A mentor has been down this path previously; a sherpa has traveled the road too many times to count.
- A mentor walks beside you along the way; a sherpa is often running ahead to help clear the path.
- A mentor actively talks through the issues and challenges at hand; a sherpa foresees the challenges ahead and positions the journey for you to help overcome them.
- A mentor is interested in both your personal growth as well as success; a sherpa wants both but also feels duty to protect when calamity is near.
- A mentor brings a set of expectations about the relationship; a sherpa often surprises you with his involvement (or intentional lack thereof at times).
- A mentor is typically one or two stages ahead in (career) experience; a sherpa has seemingly been doing this forever.
All along my professional career I’ve aggressively proactively sought mentors to help with the journey. However, it wasn’t until we started NextView a few years ago did I (along with my partners) find sherpas who possessed an extremely generous willingness to help in building our firm, and I discovered a kind of advisor which was really different. Startup founders similarly look to bring in outside help with both formal and informal advisors into the orbit of their companies. While accessible mentors should and do play an invaluable position, I think it’s helpful for entrepreneurs to also seek and individuals who can play a sherpa role. An unexpected clearing of a path ahead rather than just a warning about an obstacle can preserve energy and resources for bigger climbs ahead. And the wisdom from someone who grew up on the mountain rather than just someone who “knows” it is invaluable.
- Mar 04, 13
The web has become increasingly visual.
Of course the same broadband penetration trends which catapulted the rise of online video over the previous decade also empowered delivery of image-heavy web pages. But more importantly and more recently, the proliferation of high-resolution screens epitomized by Apple’s Retina display means that today’s web browsing experience can be far more visually stunning than ever before.
And so the past few years we’ve seen glossy graphically-rich sites which are image-centric become commonplace. The endless scroll of Pinterest, Polyvore, The Fancy, Behance, Tumblr, are just a few mainstream examples of a broader trend towards graphically-rich design, but this aesthetic carries to longer-tail sites like foodgawker which have embraced this paradigm. The content on these sites are laden with products, largely submitted by consumers. These product images represent valuable brands – in categories ranging from beauty and home goods to fashion and food. Yet brands don’t understand how their own image and photo content is being shared across the broader web, either on the above sites or even core social sites like Facebook and Twitter.
In comes Triple Lift. It offers the first marketing platform built for the visual web which takes into account how a brand’s images resonate among consumers. Using real-time image engagement analytics, the company identifies and amplifies brands’ images through initiating paid media and catalyzing earned media. Triple Lift is an ad tech company, which means that the power of the offering is really under the hood. So rather than going into the details about how the combustion engine works (which you can begin to read about on their product page), better to share what they’ve already powered: Triple Lift has delivered successful campaigns for brands like Gucci, Martha Stewart, and Puma just to name a few.
With all of our seed stage investments here at NextView, we both look at the market opportunity as well as the team behind the startup. All three Triple Lift co-founders – Eric Berry, Shaun Zacharia, and Ari Lewine – come straight from AppNexus … exactly the right core advertising technology DNA which we’d want to see in an authentic founding team.
Today Triple Lift announced their $2M seed round financing. We at NextView Ventures are happy to join co-investors True Ventures, iNovia, and the rest of the syndicate. With this investment, everyone around the table is excited about transforming marketing on the web as we know it. As the web changes, so should brand’s approach to reaching consumers on it. The visual web has arrived… and so has Triple Lift.
- Feb 11, 13
VCs like to give out homework. They won’t call it that, though. But rather they use words like “diligence” and “information requests.” Just like in school, the homework can actually be productive, as in this case it can lead to a new customer or advisor. But just like bad teachers did in grade school, VCs sometimes assign completely useless busywork.
Receiving a homework assignment or two after initial meetings with a venture capitalist is generally a good sign – it signals that the potential opportunity is interesting and exciting enough to engage further. They’re often positioned as simple diligence requests that (actually often genuinely) help an investor get a better sense of the startup and its prospects. Yet as those initial assignments turn into an endless string of assignments, the signals can turn south. At the best it’s an indication of indecisiveness, and at the worst repeated homework can be indicative of bad intentions to show minimal engagement to “hang around the hoop.”
There are a number of reasons why venture capitalists give out homework to entrepreneurs who have pitched them… usually the rationale isn’t one of the following, but rather a combination:
- Answer specific questions. Whether it’s about the market, competition, etc., VCs typically want to “get smarter” about a domain, especially if they’re less familiar.
- Validate thinking. VCs walk out of a pitch with a thesis – it might be about the team or the market opportunity or whatever – but they like to hear from others that that thesis is indeed sound. In other words, they seek supporting points to verify their reasoning.
- Overcome their partner’s objections. If a new non-linear homework assignment comes up mid-evaluation process, it’s typically a direct reaction to a VC’s partner objecting to the investment on specific grounds. The homework assignment can be a way to provide ammunition to overcome those objections politically (especially within larger firms).
- Build trust. Sometimes the content of the assignment is irrelevant, but rather the VC is utilizing the process as a way to build a rapport and see how an entrepreneur interacts beyond an hour pitch-meeting. The process can reflect if an entrepreneur listens well and is open to feedback, meets expectations about output, and generally does what he says he’s going to do.
- Delay. Going through a process of repeated diligence requests can sometimes be intentional stalling tactics to a deal process, allowing VCs to gather more data and preserve optionality for as long as possible.
- Play chess. Assignments can be a part of a larger power-play game with respect to negotiation of an eventual deal.
Given the above motivations, a number of kinds of homework tasks can emerge:
- Produce more internal reports. Often VCs are looking beyond the headline numbers in a pitch deck to validate that the “traction” is truly real or just spun for a presentation, but other times the requests are just to verify what an entrepreneur said is true is.
- Produce financial models. Sometimes these spreadsheets are helpful to run different scenarios about what the drivers are of the business are and/or outputs under different sized capital raise. But more importantly, it’s a way to demonstrate deliberate thoughtfulness about the business. However, there is a risk (and I’ve seen it happen) of VCs sending an entrepreneur on endless modeling exercises which are completely useless – you can’t dictate the impossible into reality, but you sure can model it.
- Assemble (third-party) reports. Additional information about the market sizing, competitive dynamics, potential acquirers, etc. can help educate an investor about a space where s/he is less familiar.
- Allow for customer / partner / advisor / employee conversations. It’s sometimes a sensitive topic to allow potential investors access to key constituents within an emerging organization, especially customers, but they are often the most revealing about the opportunity and can be the final convincing data to push an investor towards conviction.
- Talk with a own domain expert. VCs have their go-to people in their network, sometimes formally affiliated with the firm or sometimes just friendly informal relationships, who they introduce to entrepreneurs to hear their perspective on the opportunity (see #2 and #3 above).
- Talk with new potential customers or partners introduced by the VC. Often if a VC has made other investments in a (related) space, he is able to introduce potential new customers or partners to a company even before making an investment. These kinds of intros (if they’re actually apropos) can be beneficial to the startups, but they also give an investor the ability to first-hand see how a potential new customer reacts. Trouble, however, can arise if that customer isn’t as good a fit or has another idiosyncrasy which generates erroneous feedback back to VCs.
In all of the above, I haven’t shared a value-judgment to either the motivations for these assignments or the types of them. But it’s clear that some can be quite constructive for a startup, while others can be neutral to even unconstructive. My partner Rob Go wrote a post a couple years ago about interpreting diligence requests to figure out whether indeed they’re “bad” or “good.” Because just as a VC uses the diligence process itself to evaluate an entrepreneur as the leader for an investment opportunity, entrepreneurs can similarly use these interactions to decipher if a particular VC is going to be a good partner to the company going forward once an investment has been made.
- Jan 22, 13
About a year ago, I wrote a post about how office space is the face of a startup – it communicates both an outward message and provides insight into what’s going on underneath, as the physical environment in which startup employees work inevitably match the company’s story and culture. Recently I’ve been thinking that it’s not just the space of a startup itself which matters, but that perhaps also the location of that office which matters as well. Startups invariably seem to cluster together, and there’s perhaps something meaningful to that phenomenon.
So just as a thought-experiment, I plotted both NextView Ventures’ Boston-based and Manhattan-based companies on a map to see what the picture looked like. I kind of knew the answer beforehand, but not to the extent until I actually went through the exercise. (My partner Rob Go recently took a stroll through the NextView portfolio in a post which only briefly touched upon geography.)
First, take the startups in our portfolio based the greater Boston + Cambridge area. In reality, though, that “area” isn’t too large. In fact, with one exception, the office locations are fairly binary – either they’re located in/outside Kendall Square in Cambridge [green + purple below] or in the Leather District in Boston (which is sometimes but not always counted as part of the Innovation District) [orange]. In fact, what is interesting to note which isn’t on the map below, is that an overwhelming 70%+ of our Boston/Cambridge portfolio started the company either at One Broadway in the Cambridge Innovation Center or within two blocks of it (including at Dogpatch or other VC’s offices) [purple]. But then as headcount grew along with the importance of a dedicated space and the need for better per-sq-foot pricing, our portfolio has fanned out further from the Kendall Square epicenter [green] or hopped the river but stayed on the T redline.
View NextView Ventures Portfolio Companies in a larger mapIn Manhattan, the map our portfolio company locations is similarly consistent. Again, with one exception, all of the startups in our portfolio are one east-west block from Broadway, running from 30th street through the Flatiron to just south of Union Square.
View NextView Ventures New York Portfolio Companies in a larger mapSo what’s the takeaway here? Do we at NextView Ventures only invest in companies which are located in these shaded areas, using it as a selection criterion for investment decisions? Quite the contrary; rather we see a trendline because it’s a correlated reflection of the choices of the company types which we invest in. Internet startups are the starving artists of the corporate entity set – they optimize around relatively cheap rent, accessibility to transportation, and a certain intangible “vibe.”
On the other hand, venture capitalists are lagging, not leading, indicators for startup locations. There has been much ballyhoo about the migration of venture capital firms from Waltham to Cambridge over the past five years. But to me, it’s a non-story… the startups were already there, so of course VCs had to follow. It’s interesting to note that when we at NextView selected our own office location as the Leather District for us a year a half ago, one Waltham-based VC told us point-blank that it was “terribly stupid decision.” Today we’re now neighbors in our building with Uber, our portfolio company TurningArt, and social media marketing firm Likeable Media, among others… including three other portfolio companies on the above map a stone’s throw away [orange]. But again, as VCs, we’re here because that’s where startups are, not the other way around.
In the end, I think that startup location matters because it’s indeed correlated with success… but of course it doesn’t cause it. Startups gravitate towards each other because they have similar needs and employee profiles, and there is actually something to innovation density breeding additional innovation. So the right way to go about finding a location isn’t to figure out what peer startups are doing and copy, but rather figure out what’s best for the company itself… but you might just end up in good company in the same neighborhood anyway.
- Jan 03, 13
Happy New Year and welcome to 2013. According to all of the blogosphere chatter over the past month, seed-funded internet startups are entering this year gearing up for the now-near-infamous Series A Crunch. The CB Insights report specifically which came out just before the holidays put a bright light on the supply-demand imbalance of the seed-stage companies searching for Series A capital. The figures are indeed the facts, and this report is probably the most accurate reflection of what has actually happened in the rise of the number of seed investments completed over the past couple years. However, I would take issue with the near-consensus conclusion of what is to follow.
There is an incorrect implicit assumption in the Series A Crunch talk that all of the seeded companies are in the funnel to raise a Series A. Look back to the reasons why there was a Cambrian explosion of seed funding in the first place – a dramatic reduction in the initial capital requirements to launch a new company because of cloud hosting infrastructure, social graph distribution platforms, open source and low-cost development tools/methods, etc. It is for those same reasons that it is capital efficient to start a software bits-based company that it is also now just as capital efficient to operate a software bits-based company. What isn’t as efficient is aggressively scaling a business ahead of cash flows, which is the reason why companies of any sort raise capital (equity and debt) in the first place. Given the ability to plug into (often self-service) monetization platforms and/or employ freemium models which weren’t available or de rigueur five years ago, seed stage companies are able to transform into seed stage businesses (with real revenue!) to become not just ramen-profitable, but sustainably profitable.
The nuance which isn’t being recognized is that most of the companies of this latter profile, while viable businesses, aren’t venture-scale businesses. Businesses which should and do attract venture capital are ones which have the potential to be both high-growth and extremely large. Many startups which have been seeded in the past couple years just don’t fit this profile, but that doesn’t mean they’re not viable businesses which are going to hit a brick wall and Crunch, as has been prophesied. Instead, startups are now empowered to create focused services which benefit a small niche audience.
To use an analogy, think of starting newspaper/magazine in the previous century. At the beginning of the 1900’s, the only way to do so was make a capital investment in a large printing press, so the only audience justified was an entire metropolitan city. But as the printing technology improved dramatically, the ability for publications which served smaller and smaller niches became increasingly viable. Then not every newspaper needed to be as large as the New York Times or required the capital to do so. We’ve seen an accelerated & compressed version of this phenomenon over the past decade in bits-based startups, which has led to a proliferation of niche services. Just as a small community newspaper or a special-interest magazine didn’t need significant amounts of capital to become sustainable, so too today with many of the recently seeded startups which have focused services for a specific target audience or customer-set.
Not to say that there aren’t plenty in the category of photo-sharing apps or mobile games which required mass audience which never materialized. Or that entrepreneurs or their investors sincerely believed that they had a venture-scale opportunity in front of them, but it turns out that they didn’t. But a ramification of the Lean Startup movement which has been espoused and adopted is that you directly serve customer’s needs, even though the opportunity to do so might not in the end be large or high-growth.
So it doesn’t surprise me at all that in the CB Insights report cites that “seed deals in which VCs participate have a historically higher rate of getting follow-on financing as compared to seed deals in which VCs are not participating.” Despite the signaling issues present, VCs getting involved at the seed-stage have the lens to and propensity to recognize those sets of companies which truly do have the potential to become venture-scale businesses.
In the end, just as always: startups are risky and a majority of them do not survive. But good businesses are inherently that – good businesses, and the exceptional ones which can be both high-growth and extremely large will attract additional venture capital regardless of any Crunch. Others in this recent cohort of seed fundings will find alternative capital sources or will accelerate their path towards cash-flow sustainability. However, sensationalist headlines about thousands of companies “evaporating”, “dropping like flies”, or being “kill[ed]” will surely generate pageviews, but isn’t an accurate picture of what 2013 will actually bring. So the good news is that I don’t think startups should be entering 2013 with a Crunch-mode mindset, but rather, they should be entering in a business-building-mode mindset… which is a good mindset to have been in all along.
- Dec 17, 12
Most first and second pitch meetings with VCs are fairly lopsided, where entrepreneurs spend the bulk of the time sharing their businesses, rather than being a true exchange of both parties in developing a relationship. However, there is typically (and should be plenty of) time for founders to ask VCs questions about their approach and working-style to help determine if there’s a mutual fit.
Somewhere in the past few years a meme developed that a sophisticated best-practice question to ask a VC in early conversations is something like “Where are you in your fund’s investment cycle?” The idea is that if a venture firm is towards the end of its capital availability that they’re much less likely to invest in a new startup, and that there are even cases of “walking dead” firms taking entrepreneur meetings to maintain the appearances of being “in market” with very little intentions (or ability) to invest at all. These situations are certainly prevalent and therefore entrepreneurs need to be cognizant to avoid spending too much time with a venture firm where the end result of the conversations isn’t going to be fruitful. However, it’s rare that a venture capitalist is going to point-blank admit that his pockets are empty. There are too many ways to answer the question above without really addressing the heart of the issue: the likelihood of making a new investment. Because most venture capital firms reserve the bulk of their capital for follow-on investments, and a smaller portion for initial investments, it’s not difficult to spin the numbers to tell a story since about how there is still a pool of capital available… except it’s earmarked for something else. Moreover, the situation is more nuanced – given that some firms at the tail end of their fund have confidence in the ability to (or have already been able to) raise a new fund, whereas others do not, being at the tail end of fund isn’t necessarily a bad thing. Or it can be especially negative if a firm changes its strategy toward the end (like investing in a number of seed round with about capacity for any follow-on). It just all depends.
A little simple homework can rule out asking the question altogether. Nearly all VC firms follow an initial three year initial investment cycle on a ten-year fund life (with the possibility of extensions). So if you’re meeting with a firm which has raised a new fund within the past three years, it’s pretty safe to say there is available capital for new investments. A simple Google search can usually yield an answer, and it surprises me how many entrepreneurs fail to do this before asking about the fund’s investment cycle in a meeting.
Once a venture fund’s life is entering the fourth year and beyond, the situation can change. In this case, the best way to determine future behavior is to look at recent behavior and use it as a proxy. The better question to ask is: “When was the most recent new investment your firm made which had the size & shape of the one which we’re seeking?” Often you can fund this information on the web (like on Crunchbase) anyway, but sometimes, and especially with seed investments from larger firms, not always. A venture firm has a tendency to slow down towards the end of its initial investing cycle, rather than coming to a sharp halt, so the longer since a recent investment of the same profile, the less likely the capacity and willingness to add another investment. It seems as though there’s always room at the end for potentially one more investment in a fund, so venture capitalists always like to keep the door open, and may feel given that fact it’s not disingenuous to do so. So in the end, the grey area of a fund’s initial investment period end is going to be opaque at best. It’s productive then for entrepreneurs to play detective to ensure that they don’t waste their time on conversations with firms without the capacity to invest, but also to be realistic about the clarity of the answer uncovered.
- Nov 12, 12
Brian Halligan had a great post up last week about the lessons learned from raising a mezzanine round of financing. It’s really interesting, but perhaps only applicable to a more limited set of entrepreneurs. However, there was one gem of a small section in there with a more widely acceptable takeaway:
“It turns out that the terms from your Series A are most often cut and pasted into your later round deals. When you compromise on terms in the early stages, you will have to pay the price in the later stages. You generally don’t start from scratch and rehash the terms.”
As a seed stage investor here at NextView seeing our companies progress down fundraising paths, I think it’s extremely important to highlight that terms in early rounds do set precedent for terms going forward. And that’s not just for Series A deals; this phenomenon starts even from a Seed round.
One could cite that the reason for this behavior is pure laziness, as Brian alludes to in a “cut and paste” mentality of later investors. But the more meaningful reason that early financing terms endure into future rounds is that negotiation away from terms already in place are just that – negotiation. In other words, new investors must use their leverage in the discussions to proactively change those pre-existing terms rather than focus on price, new terms relevant only to this deal, or other aspects of this specific round where they have an interest in influencing (like syndicate composition or allocation). And even when that’s possible given the situation, the old terms provide an anchoring point for all new terms to be referenced against, so they don’t end up straying too far except if there’s a real meaningful reason for them to differ.
Given that this phenomenon is fairly pervasive, I think that there a number of takeaways for entrepreneurs who are raising early rounds of capital:
- While valuation is the most salient point in a deal and certainly important, terms matter quite a bit and A LOT more than most entrepreneurs pay attention to. Terms don’t start as in-your-face numerical figures… but they do end up that way when it comes time to exit.
- Earliest terms matter most, even and especially in the seed round, because they set not only the base literal structure, but also the “tone” for future financings. Once there is punitive-looking round, the more likely the company will be a punching-bag on terms in subsequent rounds moving forward. In contrast, valuation always has room to move up.
- Terms precedent is one solid reason (among others like founder-investor alignment) that entrepreneurs should have bias towards priced equity round vs. convertible notes in seed financings. While the intent of notes is often to delay setting a valuation until context is more crisp, kicking the can on terms can be dangerous. It’s preferable to set them early as possible when investors are most accommodating as in seed round (because they too have incentive for clean terms without bells & whistles which could eventually hurt them as well).
Yes, early terms endure. It makes sense then for everyone involved with early financings to consider not just the deal at hand, but also what it means for the future.
- Nov 05, 12
There are a couple classic archetypes of internet/software founders, including the genius college student cooking up something quirky but ultimately disruptive in his dorm room who launches his company straight out of undergrad. But the other archetype is a thirty-something entrepreneur who, taking his experience seeing the playbook of success at larger growing startups or even “established” companies, utilizes that domain and functional expertise as unique insight into founding a company. This latter persona is still hungry, but is able to really leverage that experience-set.
While a year ago there was much ado in the blogosphere about the peak/best age of an internet entrepreneur – whether it’s someone under 30 with fresh de novo thinking – there is some statistical support that the successful thirty-something entrepreneur is actually more prevalent. Anecdotally, you can point to examples here as well (Zenstrom / Skype, deWolfe My Space, Hoffman / LinkedIn, Williams / Twitter were all in their thirties). In reality, there is no “best” age to start a company, but rather different cohorts produce different profiles of entrepreneurs and resulting companies. (And at NextView Ventures, we’ve funded both young entrepreneurs out of college as well as veteran executives in their forties, along with a range in between.)
One historical challenge with the Boston entrepreneurial scene is that while we have a continually refreshing supply of the nation’s brightest coming out of our local prestigious educational institutions, for the better half of a decade in the 2000’s we were both losing people coming out of school, plus we had fewer of the second set of thirty-something internet entrepreneurs referenced above. Two years ago Jeff Bussgang lamented about “Lost Generation” of entrepreneurs which I think is especially acute here in Boston.
My own personal story fits in with this narrative. I was in my early 20’s just barely out of school when four of us (peers) started Sombasa Media (aka BargainDog) here in Boston beginning in 1998. We rode the bubble wave to a successful outcome in 2000, and after moving away for a few years which included a stint at business school, I returned back to Boston in 2004, and it felt like the web entrepreneurial community had almost entirely scattered after the crash. Reactions when I told people I was an “internet entrepreneur” ranged from smirks to blank stares.
In only a few short years, the strong pillars of the local Internet scene, like Lycos & CMGI (+ affiliated companies), had fallen away and been rendered irrelevant. Along with their demise came a dismissive attitude about most entrepreneurial web-related endeavors. It surprises me how little this fact is talked about in Boston, but there was a vacuum left behind with these potential powerhouses withering away. If you had a few ounces of entrepreneurial blood in the late 90’s, of course you started an internet company (for better or for worse). But from the middle of the last decade onward very few peers of mine were starting companies because they hadn’t had the opportunity gain that valuable experience like they would have had at Yahoo then Google on the west coast -or- they were dissuaded from negative experiences during the crash and a challenging atmosphere after. Instead, they had fled to other industries and those other geographies. My own motivations for starting the Web Innovators Group in 2005, and the reason I believe it took off so quickly, is that there were relatively few people in the community, but those who were all yearned to congregate and find a similar network of like-minded individuals.
Today the landscape is very different from 2004. First, there is an organized community net which is better (although certainly not perfect) at “catching” raw entrepreneurial talent out of the universities and keeping people here in their 20’s. Recent initiatives like Startup School are easy examples to cite, but there are numerous programs including the proliferation of networking events which have laid an infrastructure support to help keep the next Zuckerberg from slipping through the cracks. But second, we’ve also had a number of internet successes which have trained and developed people (e.g. TripAdvisor, Brightcove, Constant Contact, Wayfair) over the past few years where employees are beginning to roll out to start new ventures. And the larger imports (Microsoft, Google, eBay… recent challenges not withstanding) have now been established for a time that people have had at least a few years to formally train in internet software product development areas. And so that second cohort of thirty-something entrepreneurs is just now emerging as a solid group because there have been places for the internet skillset to develop. For example, it’s much more prevalent today in 2012 to have been a tactical internet marketer for the past five years whereas in in 2007 is just wasn’t. There is also now a third cohort, though still rare, of awesome people who have had entrepreneurial success experience during the 90’s boom now building truly transformative companies later in their careers who had moved away & returned, who eschewed a venture capital role after a brief stint, or who had been doing it all along. Plus, on top of it all, with accelerator programs we’re net importing kick-ass founders from all over the world. But last of all, attitudes have changed – you CAN build a great internet company here in Boston, and we have a community which sincerely believes it.
So in Boston, it’s essentially taken a decade, but we’re finally overcoming the crater that the failed local internet giants left behind after the 90’s bubble. There are now three strong cohorts of internet entrepreneurs ripe with ideas & passion who are deliberate about staying here & building the center of the universe for emerging platforms. And that certainly wasn’t the case when I moved back here in 2004. With real clusters of strength in areas like mobile, marketing, and consumerized B2B SaaS – Boston is entering a golden age of internet entrepreneurs positioned for the future.
