Venture Returns by Sector
Readers of this blog know that I love sharing data from Correlation Ventures (they have a pretty extensive database of venture deals and venture outcomes and love to post share trends from time to time) – see two great examples using their data here and here from this blog. A few weeks ago they sent around the chart below which I thought was interesting to share. I’m not surprised at the non-pattern here – as an industry venture is very stochastic. Venture returns are all over the map, really underscoring the need to time diversify venture investing and venture exiting, to the extent to which the latter can be controlled (this graph doesn’t show the date of initial investment, which would be a great new cut at the data – I’ve asked Correlation if they could re-run the analysis that way and will post it if I can get it). Also interesting to note the blip of “Consumer” in 2013 as well as what appears to be a bit of a countercyclical trend in healthcare. Sometimes there are interesting tidbits to be taken from seemingly chaotic data. …
May 9, 2016· 1 min read
The Profit Imperative
With the markets crashing around us and the sky once again falling I thought it was time to revisit a few fundamentals and perhaps more importantly share some what what we’re now seeing in the private funding markets. Growing Profitably. Let’s start with what I labeled the Growth Imperative a few months ago in a post, where I pointed out 1) that investors were (over) valuing growth and 2) that when this changed it was going to change quickly (and in a separate post said: “when the growth imperative shifts to a profit focus, companies with high burn and weak operating metrics can get stuck in the lurch.”). It always amazes me how quickly the markets can shift and how rapidly investors change their mind set. But they do, and they are right now. We’re seeing lots of market data points that suggest that the private markets have shifted dramatically to a Profit Imperative, overnight eschewing high growth/high burn with no line of site to profitability and favoring companies that are growing more slowly but doing so profitability or with a clear path to profitability. There’s an increased focus on key metrics – especially those core metrics that drive the spend/growth curve such as LTV/CAC and months to pay back CAC. …
February 10, 2016· 3 min read
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). …
April 2, 2015· 6 min read
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 I can tell you the process is quick and painless; end of advertisement, but seriously – these data are from their work and the fact that they’re so interesting shows why the model works for them). …
November 20, 2014· 3 min read
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 have the raw data to run my own cuts of the analysis. And more importantly the data were financing level, not company level. A bunch of people asked me about this and I’m working with Correlation to see if the next time they do this analysis we can get a few different views of the data. …
August 13, 2014· 4 min read
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. …
August 12, 2014· 4 min read
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 negotiating a round. The problem, of course, is that their convert is already a part of their capitalization – even though it’s not reflected on the cap table. There’s nothing nefarious here on the part of entrepreneurs, but I’ve recently been involved in a few situations where this key fact was skipped over and as a result their expectations for their ownership/total dilution of a subsequent equity round was completely wrong and because of that a deal (at least with us) didn’t come together (in one case the entrepreneurs viewed the convert as a post equity deal event, meaning that they thought they were negotiating a round with us that would then layer on the debt conversion – exactly the oppositie of how it actually works!). …
October 8, 2012· 3 min read
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 our state is paying off. I often tell people when they ask me how to replicate the success we’ve had here in Colorado that the journey is a long one. When building an entrepreneurial community one needs to take a 10+year view of the effort. When I think back to what the Colorado market looked like when I joined the venture industry about 12 years ago (based here, but working for a CA firm), it’s almost hard to fathom the changes. And while the number of venture firms located in Colorado has diminished significantly in that time, the overall entrepreneurial environemnt has really flourished. All giving support to what I believe to be a key truth about our industry – entrepreneurs come first! …
May 1, 2012· 2 min read
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). …
April 23, 2012· 2 min read
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 early-stage investors. …
August 30, 2010· 9 min read