LPs and Diversity

A lot has already been said and written about what is happening in our tech community with regards to how Women Founders are being sexually harassed and/or assaulted.  Recently, several Men have lost their jobs (careers?) for their behavior and I suspect others will too.

In addition to vocalizing how this is an issue, what actions can we take to improve things? While Women are at the center of the recent discussions, I do want to expand the conversation and include minorities in our community, as they are being impacted due to racism.

One of the most important areas we need to work on is diversifying the GPs (General Partners) of early stage VC funds.   The reason I say early stage funds, is that they are usually the first to financially support a startup, at a time when the company has very little data/revenue, so the VC is making a big bet on the Founders(s).  As you can see below, 92% of senior investment professional (GPs) are Men.  78% of GPs are White. The image below was via an article written by Kim-Mai Cutler in 2015.

screen-shot-2015-10-05-at-11-38-20-pm

The fact that there is a lack of diversity in the senior GP ranks, isn’t news but it is worth to highlight this again, especially for LPs (Limited Partners) who are reading this post (hopefully they are).  White males are not more capable of running firms than other gender(s) or ethnicity.   I believe that LPs have the most power in changing the make up of how VC firms look.   We need LPs to think about diversity when they invest their capital in VC funds, so how can we help?

Specifically, we need to mentor new and diverse VC funds (aka Emerging Managers).   We need to help leverage our LP rolodex to get these firms access to capital.  We need to help provide high quality Founder referrals.  We need to get these professionals engaged in industry events/dinners that we organize.  We need to ask these firms, “how we can help”, as every firm has different needs.  I don’t want to assume that everyone is looking for help or needs help but it doesn’t hurt to ask them if they need help.

If you are a VC, are you willing to share some of your LP connections?  Are you willing to invite these firms into your syndicate?  Are you willing to invite them to your dinners and/or speaking events?

Given that I’m based in NYC, I want to take this time to highlight diverse emerging managers based here.   If you are LP and haven’t already spoken to these firms, it it worth exploring why that is and finding time to connect with them (assuming they want new LPs now or in the future).

  • 645 Ventures
  • AlphaPrime Ventures
  • BBG Ventures
  • Female Founders Fund
  • Flatiron Investors
  • Future/Perfect Ventures
  • Human Ventures
  • Lattice Ventures
  • New Age Ventures
  • Primary Ventures Partners
  • Rucker Park
  • SoGal Ventures
  • Startup52
  • Techstars IoT
  • Third Kind Venture Capital
  • Trail Mix Ventures
  • WME Ventures 
  • Work-Bench
  • XFactor Ventures

Please let me know if I missed any firm(s).  This list is comprised of firms who meet all of the following criteria:

  • HQ’d in NYC
  • raising Fund I/II and/or currently investing out of Fund I/II
  • General Partnership is comprised of at least one woman and/or minority.  This person has to have substantial carry (which to me, means they are one of the leaders of the firm)
  • Early investment focus (Seed/Series A)

The point of the post is not to throw LPs under the bus, but it is fair to say they could be doing more to change the diversity of firms.  That being said, every stake holder in this community (including me) has a role that they can play in making changes that improve the makeup of VCs (and Founders).  It is worth taking time to think through how you personally can be helpful, I’m still thinking through it and welcome any feedback/thoughts.

My commitment is to help the above mentioned firms.  I have helped a few of them already but need to do more.

 

 

VCs who back the best* startups in NYC

Recently went through the exercise of creating a list of the best* startups in NYC.  The companies ranged from seed funded startups to Pre-IPO companies (so, all are still private).  The process was partially data driven, partially based on word on street and partially based on my interactions with the founders of those companies.  It was really more subjective than anything else.  Ended up coming up with a list of ~60 startups.

Decided not to share the list, as it was really more of exercise to see if it was possible to narrow the list down to manageable number.   The good news is that there are so many exciting companies in NYC, that is was a very tough process to get it down to 60 startups.

One insight I thought would be interesting to share, is which VCs most frequently show up as backing these best* companies:

  • Box Group – 7 investments
  • First Round Capital – 7
  • Lerer Hippeau Ventures – 6
  • Thrive Capital – 6
  • Google Ventures – 5
  • Founder Collective – 5
  • Index Ventures – 5
  • Accel Partners – 4
  • Iconic Capital – 4
  • Union Square Ventures – 4
  • Wellington Management – 4
  • Institutional Venture Partners – 4
  • RRE Ventures – 4
  • New Enterprise Associates – 4
  • Battery Ventures – 4

There were many other VCs that showed up, but the list above reflects the firms that are most active in backing the best* startups.

Now, I think the early stage VCs deserve more credit than the later stage VCs, as the late stage folks have data/revenue to hang their hat on.  So, just take that into account when reviewing the list.

PS If you put together a list of your top 60 NYC startups, happy to meet up in person and debate the list over coffee.

*this list wasn’t produced by any scientific means, was mostly subjective and we will likely disagree on the outcome.  Please send the hate mail to Santa Claus, PO Box North Pole 🙂

 

 

 

NYC sub-sector trends in 2016

Many people ask what is happening in the NYC startup scene and they still assume it is mostly adtech, commerce and content.  That might have been true in the past, but it’s not what is happening now, at least based on anecdotes and what I’m seeing.  Decided to do use some data to determine if this accurate.  Used Pitchbook to this query:

  • Seed and Series A rounds
  • rounds done in 2016
  • NY HQ’d companies

 

Below is the dollars & percentage breakdown of sub-sector activity.

The surprising trend will likely be that SaaS is leading all the sub-sectors.  Second, the trend in healthcare, big data, AI/ML will be an eye-opener.   Overall, NYC is really balanced in terms of sub-sectors and isn’t overly dependent on one to drive future returns.

I would like to see more VR/AR related startups, given how much content companies and studios are based here.

What are you thoughts on this?  What are we going to see more of in 2017?

Industry Vertical Capital Invested (in M) Percentage
SaaS $313.77 17.7%
E-Commerce $286.55 16.1%
Mobile $272.14 15.3%
FinTech $250.60 14.1%
HealthTech $135.28 7.6%
Big Data $100.43 5.7%
Artificial Intelligence & Machine Learning $72.75 4.1%
Marketing Tech $51.14 2.9%
Internet of Things $43.84 2.5%
Lifestyles of Health and Sustainability $36.84 2.1%
AdTech $33.19 1.9%
Manufacturing $30.75 1.7%
EdTech $22.08 1.2%
Cybersecurity $21.60 1.2%
Life Sciences $21.20 1.2%
Wearables & Quantified Self $20.75 1.2%
Virtual Reality $17.41 1.0%
Robotics and Drones $14.92 0.8%
3D Printing $10.05 0.6%
AudioTech $9.75 0.5%
Nano-technology $6.70 0.4%
CleanTech $3.00 0.2%
$1,774.74 100.0%

3x DPI ?

The goal of most Venture Capital funds is to drive a minimum of 3x the capital invested to their Limited Partners.  The terminology that is used and most important to dig into is DPI (Distributed to Paid In).

From time to time, you will meet some audacious General Partners, who will claim they can drive 5x DPI.

Most VC funds have a 10 years life span, meaning the 3x DPI goal should be achieved within this time frame.

Lets look at the publicly available data on Pitchbook.  I pulled up all VC funds that were in the 2006 vintage (meaning the fund started investing that year, so we are at the 10 year mark now).  Pitchbook had return data on 27 funds.  I realize that Pitchbook doesn’t have access to return data of all 2006 vintage funds, but for this exercise and to make my point, 27 is a decent sample size, considering there are 322 funds that are a 2006 vintage per Pitchbook.

Of the 27 funds:

  • NONE have a 3X DPI
  • ONE fund has 2x+ DPI (1 / 27 = 3.7%).
  • TEN funds have a 1x+ DPI (10 / 27 = 37%)
  • 17 funds has less than a 1x DPI (17/27 = 63%)

This post isn’t meant to discourage VCs or LPs, but do want to highlight that this is a very hard business to be successful at.  With so many new VC firms being formed and many  new LPs rushing into the VC industry, it is important to reiterate the point.

I’m not sure on the history of why 3X became the default return target by LPs, as opposed to 2.5X or 2X (will do some research on this).  I realize that LPs are looking for a 20%+ IRR, which is how they get to 3x DPI goal, but it is fair to say that they have misplaced expectations.  VCs are in the business of investing in outliers and therefore LPs are looking for the same, but based on this data and other available data, if you are generating 2x+ DPI, you are an outlier.

Below is the dataset that I am referencing:

6250001210802176

 

 

 

Fastest Growing NYC Startups?*

Although I’m familiar with Mattermark, I only recently started using the service.   As I got to play around with the functionality, I gravitated towards the metrics around number of employees and employee growth rate.

Given that startup revenue figures aren’t provided on any public databases that I’ve seen so far, the closest (but imperfect) way to measure the growth of a startup is by employee growth rate.  If a startup is doing well, generally speaking, they are hiring.   This is a broad statement but true in most situations. That being said, hiring a lot of people quickly, certainly doesn’t equal success and in some instances have actually driven companies out of business, due to spending too much money, but that is an entire blog post in itself.

I set out a few parameters in order to find the fastest growing midsize VC backed companies HQ’d in NYC, here was the search criteria:

  • 100+ employees
  • HQ’d in NYC
  • VC backed
  • Still private (haven’t exited)
  • 20%+ employee growth rate in the past six months
  • 2%+ employee month over month growth rate

The results (sorted by Employees Month over Month Growth):

fastest nyc startups

One ratio I thought was particularly interesting, was (Employee Count / Total Funding). If this ratio is high, you COULD derive a few things: 1) they are more capital efficient 2) likely to be generating significant revenue.  For example, look at Movable Ink, an enterprise software startup.  They have 139 employees and only raised $12.3M to date.   If you want to use this ratio, it would only be fair to compare apples (Enterprise SaaS) to apples (Enterprise SaaS), as opposed to apples (SaaS) to oranges (Hardware).

*Again, this is certainly an imperfect way to find the fastest growing startups or most capital efficient, but it can provide some insights on these two fronts.

 

VCs who lead seed deals in NYC startups

Sent out a few tweets last night:

While there is a lot of discussions (and some clarity) on how the opaque VC world operates, it is still hard to get data for Founders who are fundraising.   In particular, getting information on seed rounds is challenging as many rounds are not announced and the specific VCs who invested, aren’t always listed.  To make things even more murky, who actually led the round isn’t always disclosed.

While fundraising is supposed to be challenging for startups, we could make it slightly easier for Founders to identify who the active VCs are and more importantly, who are actually LEADING rounds.   Many of my discussion with seed stage Founders are about fundraising and there is a lot of confusion as to who leads rounds vs those who participate rounds, a very important distinction.  In order for a round to really come together, you need a VC who will lead the round, which typically means they are setting terms (“pricing”) and writing the largest check in the round.

The criteria I’ve set is as follows:

  1. NYC HQ’d startup
  2. VC has raised a new fund in the past 36 months
  3. VC has led (or co-led) two seed deals in the past 12 months in NYC (see point #1)
  4. Check size of lead VC is $500K+
  5. Round size is $750K to $3M (could be an equity or a convertible note instrument)

So with the parameters outlined above, I have gone out to several data sources to see what could be found, although it has not been fruitful, at least on the point of who lead the round and how much they invested.

Given that many of the VC rounds haven’t been announced, the data isn’t actually available yet, so I also solicited feedback from the community on which VC firms fit ALL of the parameters outlined above (in alphabetical order).

  • Accel Partners (SF)
  • Bloomberg Beta (NYC and SF)
  • BOLDstart Ventures (NYC)
  • Bowery Capital (NYC)
  • Canaan Partners (NYC and SF)
  • Collaborative Fund  (NYC)
  • Eniac Ventures (NYC and SF)
  • ff Venture Capital (NYC)
  • First Round Capital (NYC and SF)
  • Flybridge (NYC and Boston)
  • Genacast Ventures (NYC and Philadelphia)
  • Greycroft (NYC and LA)
  • Homebrew (SF)
  • IA Ventures (NYC)
  • KEC Ventures (NYC)
  • Lerer Hippeau Ventures (NYC)
  • Metamorphic Ventures (NYC)
  • NextView Ventures (NYC and Boston)
  • Primary Ventures (NYC)
  • Resolute Ventures (SF and Boston)
  • SBNY (NYC)
  • Scout Ventures (NYC)
  • True Ventures (SF)
  • Two Sigma Ventures (NYC)
  • Union Square Ventures (NYC)

I’m actually surprised the list is this long, thought it was much shorter when I sent out the original tweet.  That being said, my sense is that there is room for more players as some of these firms are focused on specific sectors, while other sectors aren’t covered as actively.  In addition, the market is growing and there is an increase in the amount of seed stage companies being formed.  Lastly, most of the firms listed above are leading on average two deals per year in NYC, so that means ~40 NYC based startups would have lead every year.  I would assume there are more than 40 high quality companies per year in NYC that should have a lead, so again, room for more players.

If you think I missed your firm on this list, please send me a note at sgoldman at svb and provide specific information on which deals you have led in the past 12 months, thank you.

This list was purposefully focused on seed deals.  I think pre-seed is a distinct category and deserves a separate post/list, might work on that, stay tuned.

I have received feedback from people on the parameters that I set out.  They were done thoughtfully based on discussions with stakeholders in the community.  Feel free to write your own post based on other parameters if you disagree with mine.

Series A firms in NYC

Recently, I had a conversation with a NYC based seed stage VC, who was lamenting that there aren’t enough NYC HQ’d VC firms who are leading Series A rounds for local startups.

Naturally, I asked the twitterverse a question on this topic, this was the response:

Series A firms

As you may know, the twitterverse can be wrong sometimes, so lets find some data. We did a query on Pitchbook with the following criteria:

  • NYC HQ’d firms
  • $100M+ fund that was raised in the past 3.5 years (typical deployment time frame)
  • Led investments in NYC HQ’d startups at Series A stage ($4M+ size rounds)
  • Excluded life science sector

The results provided us a total of 14 firms*:

  1. Bain Capital Ventures*
  2. Bessemer Venture Partners*
  3. Canaan Partners*
  4. Elephant Partners*
  5. FirstMark Capital
  6. General Catalyst*
  7. Greycroft Partners
  8. IA Ventures
  9. Lux Capital*
  10. RRE Ventures
  11. Thrive Capital
  12. Tribeca Ventures Partners
  13. Union Square Ventures
  14. Venrock Capital*

 

If you look at the number of Bay Area HQ’d VC firms, who are actively leading Series A investments in NYC HQ’d startups, that number is 20.

Ideally, you would have had more local Series A investors than non-local investors, so there seems to be room for a new Series A focused firm to set up shop in NYC.

*These firms have several offices across the US but have at least one investing Partner based in NYC.  Notably, only half of the firms listed have the entire partnership based in NYC.

Thanks to our summer Intern, Lorel Sim, for pulling up the data.

P.S. – if you believe your firm should be part of the fourteen firms listed, please provide data to support the assertion, email me at sgoldman @ svb.com