The NVA Blog

A friend of mine emailed me the other day asking what I thought of the Charles River Ventures announcement that they were creating a seed-stage investing arm (Quick Start). Great topic - it’s been widely covered already so we are not exactly breaking the story here. However, this news is a good starting point for a discussion on venture capital and the metrics and forces that drive the business.

It seems the trend of “going seed stage” has been going on for awhile. Perhaps it is not so much a trend as a strategy to broaden the reach and open more doors for larger funds. It is also an indication of VCs playing with the model to improve IRR and enhance the ability to impact more companies. There are many differing opinions out there today (some say angel investing is broken, others say the VC model is broken). There is certainly something to be said for being able to place smaller bets and get in early enough to help the founders get on the right track. There are pros and cons to pure early-stage investing, but doing a seed-stage fund in conjunction with a more traditional one seems like a very smart move if you can find harmony between the objectives of the respective funds.

Bigger funds have higher demands on the IRR and have to inevitably place bigger bets. It’s all math at the end of the day, and a large VC fund typically has to produce a 20% IRR over 5-6 years. So every investment has to be large enough and cultivated to potentially produce a “home run” level exit to absorb the ones that return marginally or even crater. The bigger the fund, the higher into the billions the total market value has to be for the fund to perform. NEA is an interesting example. Great firm, impressive track record. Their latest fund, # 12, was announced at 2.5B. Yes, that’s Billion… For a 20% IRR on that fund, the companies they invest in will have to create about 37 billion in market value, assuming NEA owns around 20% of each company. So it’s go big or go home…

Smaller funds still have to perform, but a 50M fund can deploy 250k-500k into very early stage companies relatively quickly, and every investment does not have to be cultivated to produce a 300M-500M exit.

While there have always been seed-stage VCs, the recent increase in news and activity around seed-stage VC investing may be a cyclical trend. I suspect many of the firms that are huge today started with much smaller funds and did smaller, early-stage investments back in the 80s/90s when they got started. A few big hits, the next fund raised is bigger, and the return demands are that much bigger, and the next thing you know, the minimum investment a 500M fund can make is 5M…the inevitable intersection of effective capitalism and business discipline.

Additional coverage:
Redeye VC blog
A VC (Fred Wilson)
TechCrunch
Sphere Results <-cool blog search tool

The folks over at Levensohn Venture Partners have started putting up podcasts about VC-centric issues. The site is called VC-IO. This looks to be a promising resource for investors and entrepreneurs alike and it is worth checking out. They aim to “open a window” into the VC world and discuss important topics relevant to whats happening in board rooms and partner meetings. There are only a few podcasts up so far, but the quality of the content (and recordings) is excellent.

They have started with two tracks, Governance and Entrepreneur. I thought the discussion of board room alignment on the Governance episode 2 was quite interesting and provided some meaningful nuggets of info around the value of having investors and board members who are philosophically aligned and share similar risk profiles. The value of these podcasts is that the participants are speaking from experience and provide real-world examples and context to the discussion.

You can subscribe via iTunes or RSS for updates from the site. Check it out!

Paul Graham (overall smart-guy and Y Combinator partner) has put together a great reference list of the issues that can kill startups. If you are an entrepreneur, print it out and put it on your wall. Or everyone’s desk. The full list is here.

It is better to go into a situation eyes-open than eyes-closed, and a list like this is good to re-read every 2 weeks as a reality-check. Experience counts…and having a spotlight on the punji sticks and craters around you will only help you survive the jungle. (yes, that’s 4 clichés in one sentence!)

An unordered list of some of the most important items;

• Derivative Idea - the “me too” plays rarely work. Find a real problem that is not being solved in an elegant manner. Fix it.
• Raising too much or not enough money - There are two separate entries on this. This is a hot topic and frequently debated. There is a fine line between the two and even “smart” money comes with strings attached
• Having no specific user in mind - I love this one. Great insight here about building a product for a specific target market AND user.
• Launching too slowly or too quickly - two entries here that highlight the challenge of getting your market entry timing right, and making sure all elements of the business are ready to go.

One of the big take-aways from this list of mistakes is that there are errors to be made on both sides of any key decision. Starting a company, raising money, launching a product, etc. is like walking a balance beam. Swing too far to either side and you fall off. Perhaps this helps explain why so many startups fail, and why its so much harder than it may appear to be to actually create a successful business. There is a plethora of data, precedent and metrics out there to look at, but getting it right is still an art form.

Business blogs (like this one) are becoming more and more common and relevant as communication and marketing tools. There are a thousand conversations going on in the blog-o-sphere right now on the topic of how important having a business blog is. Some believe that companies will be left behind if they don’t enter the fray since their competition surely will. A counter arguement is that doing it right is time consuming and non-trivial and should not be taken as a “me too” decision.

Business Week has a good article on this topic posted here. Their headline “Catch Up…or Catch You Later”
Jason Calcanis, CEO of Weblogs, Inc. says blog-or-die in his post here, and there is a good discussion on this topic over at BolderBlogs.com.

Business blogs can serve a number of purposes. If you are considering starting one for your company consider the following elements;

• What is the purpose of the blog? What do we want it to do for the company?
• Who dictates/manages what gets posted? Who’s in charge of content?
• Is this another PR machine, or is this a way to engage in conversations with our customers and the public?
• Will you allow public commentary? Will you engage contentious questions or comments with thoughtful responses?
• How frequently will you update the blog? Who gets to contribute content?

What seems to be working is when leaders from companies start personal blogs and talk about the company and themselves. It’s a business blog in a backhanded kind of way, and is effective because of the personalization. The leaders get a forum to share their thoughts in an “unofficial” communication format, but rest assured what gets posted is carefully thought out and crafted.

Andrew Fife has posted a few tips based on his experience pitching VCs. This is advice I tend to give all of NVA’s clients who are doing fundraising, so it is worth relaying. View Andrew’s entire post here. Bookmark it too - you may think the advice is obvious, but you would be surprised at how often these little things make a big difference. The gist of his tips are:

1. Never send your slide deck in advance of a meeting - to anyone. You’ll spend more time explaining or defending the assumptions the reader has made than pitching.
2. Make the most of your meetings - even if you have a tough meeting and deal with many objections, you can follow up by showing execution of your plan and making sure the VCs see you are hitting your milestones.
3. Timing is everything. Andrew has whittled it down to Wednesday at 10am as being the best time to pitch a VC. Idealistic perhaps, but a good goal. Many VCs have partnership meetings on Monday, which means catch-up on Tuesday, etc.

Another useful tip in this realm is to know whom you are pitching to. Sometimes just getting a meeting at a VC firm is a feat unto itself, and you are thrilled to have ANY meeting. Even so, make sure you know enough about who you are pitching to be sure you have the right audience. Most VCs are “on top of it” and route compelling projects to the partners or associates that are focused on that market, but there are always cases where you won’t realize until 3/4 of the way through a meeting you should be talking to someone else at the firm. Research the VC’s current portfolio, investment history, and market focus.