Category

Venture Economics

Why Companies Fail

I’ve touched on aspects of this topic before, but thought it was worthy of a full post. Companies in the venture business fail all the time. As I wrote last year, the majority of venture rounds fail to return capital. With all the hype one reads in the startup press these days, that fact can be easily lost. So we know that startups fail all the time, but why do they fail? Here are some common pitfalls based on our experiences (and here I’m referring not just to Foundry portfolio companies, although all of these lessons apply there as well, but also our observations of the broader markets). Premature scaling. The number one reason companies fail in my experience is…

IPO or M&A? Here’s exactly how large companies exit

I wrote a post a few months ago based on some data from Correlation Ventures about the distribution of returns on venture deals (which revealed that outsized winners are, in fact, much more rare than most people think). Today I’m focusing on companies in those top return categories with some new data from Correlation that show the percentage of large exits (>$500M) that are generated through M&A vs. IPO (quick side note: I seriously love how much information Correlation collects and how free they are in letting me post about it – as a reminder, Correlation is a firm that co-invests based on an algorithm that predicts the success of the a company; we’re in a few deals together and…

Some more data on Venture outcomes

Quick update here. The data I site below is from Foundry LP StepStone. Since my original post I’ve confirmed with them that they’re ok with my identifying them as the source of the data. And they’ve offered to help me play with the raw data of a future report – I’ll work on some interesting updates here soon! Yesterday’s post on venture outcomes – Venture Outcomes are Even More Skewed Than You Think – generated lot of traffic. Clearly, it’s interesting to put real data against a heuristic and see how reality maps to our expectations. As I pointed out in my post, the data set from Correlation Ventures I was working with had some limitations. For starters, I didn’t…

Venture Outcomes are Even More Skewed Than You Think

The typical “successful” venture portfolio is often described as having the following outcome: 1/3 of companies fail 1/3 of companies return capital (or make a small amount of money) 1/3 of companies do well Fred Wilson, for example, described this a few years ago: I’ve said many times on this blog that our target batting average is “1/3, 1/3, 1/3” which means that we expect to lose our entire investment on 1/3 of our investments, we expect to get our money back (or maybe make a small return) on 1/3 of our investments, and we expect to generate the bulk of our returns on 1/3 of our investments. It’s a generalization but one that’s pretty well accepted in venture circles and…

That convert you raised last year is a part of your cap table

When it comes to convertible debt, I’ve had a few instances recently where “out of sight, out of mind” has created some misunderstandings around deal structures. Seemed like a good topic to cover here. Given the prevalence of convertible debt as a seed financing instrument, an increasing number of companies we look at have some kind of convert in place. This is typically reflected on cap tables in a completely separate tab to the spreadsheet that shows the debt total by investor and then some kind of interest calculation. Of course many entrepreneurs naturally focus on the main tab of their cap table spreadsheet that shows ownership by founder, investor, etc and for them this is the starting point of…

California, Massachusetts, New York, Colorado

California, Massachusetts, New York, Colorado. That’s the order of states with the greatest dollar value of seed and early stage investment according to a PWC MoneyTree study that my partner Jason blogged about today. $290M invested in 41 companies based in Colorado in 2011. Compare that with 2006 when Colorado ranked 12th on the list with just under $90M invested in 32 companies. That’s an incredible achievement and says a lot about the state of the entrepreneurial ecosystem in Colorado and our rising profile on the national stage. I’ve written extensively on why Boulder specifically, and Colorado in general, are great start-up markets (see here, for example). And these data show that the work and effort of many people in…

The Seed Signaling Problem That’s NOT Being Talked About

There’s been plenty of chatter over the past few years about the potential pitfalls for entrepreneurs taking seed money from VCs. This includes a recent and very thorough overview of the issues by Elad Gil which I’d highly recommend reading, even if you’re already familiar with the issues around seed financing (and in particular the so called “party round” where everyone takes a piece but no one takes the lead). I’ve noticed something recently that’s a bit of the flip side of the same problem that everyone is talking about but that I haven’t seen mentioned yet. I’m seeing an increasing number of Series A pitches where a company has at least one venture investor in its seed, the business…

Has convertible debt won? And if it has, is that a good thing?

Paul Graham, founder of Y-Combinator, sent out a tweet on Friday saying: “Convertible notes have won. Every investment so far in this YC batch (and there have been a lot) has been done on a convertible note.” It’s an interesting data point on Y-Combinator companies, but is this truly a macro trend? Have convertible notes really won?  And if so is that good for start-ups? Good for investors? I think the answer to these questions are that 1) it’s not at all clear that this trend is as definitive as Graham suggests; 2) it’s a mixed bag for entrepreneurs (more positive in the short run, potentially negative in the long term); and 3) it’s clearly not a positive trend for…

Am I just a greedy VC?

My partner Jason has an impassioned post up about the carried interest debate currently taking place in Congress. No matter how you feel about Congress’ efforts to change the tax classification of VC profits from capital gains to ordinary income it’s worth a read (and keeping an open mind). Obviously this issue is important to me and to all VCs. And while I know there are differences of opinions on the subject (clearly given the intense debate going on right now) I think Jason does a nice job of talking through the personal (this feels overstepping), professional (there are other markets where innovation is taking place where investor are actually being completely exempt from taxes that will draw talent away…

The new era of venture capital

You already know the about the state of the venture capital industry in 2009: venture investing down (32%), exits down (14%; slowest exit year for VC backed companies since 1995), fundraising down (56%), IPO’s almost non-existent (8 venture backed IPOs in 2009). It’s a bleak picture for the industry overall, even if there’s a group of us that continue to believe this is a great market in which to be investing (and it clearly is). These stats got me thinking about the future of the venture industry and I thought I’d offer up some thoughts on where we might be headed. First, let me frame the conversation by stating that I agree with Fred Wilson’s assumption that somewhere around $15Bn…