Does being Founder lead to being the best VC?

I don’t believe that being a Founder of tech startup gives you a better chance of being the best VC.  I have never seen any data that confirms this, if you have it, please share that in the comments section.  On the contrary, if you look at some of the best VCs of all time, they were NOT Founders of tech startups.  The great thing about this industry is that regardless of your background, you can be a great VC Identifying who is going to be the best VC, when a VC is just starting, is extremely difficult, which is why the job of being a LP is so challenging.

Here is the tweet thread that got me thinking about this topic:

 

 

 

 

 

 

 

 

 

 

I do recognize that specific words are critically important for this debate.  Entrepreneur vs Founder is a material difference.  The original premise and original tweet was about “Founder” not Entrepreneur .  That being said, most of folks on the list provided below were neither an entrepreneur or founder, a few did work for tech startups though but that is different debate.

Here is a list of folks who meet all of the following parameters:

  1. They were not tech Founders before they started leading venture rounds
  2. They started leading venture rounds (Seed/A/B) post 2005
  3. They have substantial realized gains (not looking at TVPI), meaning they distributed meaningful money to their LPs (DPI)

If you know VCs that meet ALL of these parameters, please let me know in the comment section and will add them.  In no particular order:

Rebecca Lynn – Canvas

http://www.canvas.vc/team-member/rebecca-lynn/

 

Ian Sigalow – Greycroft

https://www.greycroft.com/people/ian-sigalow/

 

Kirsten Green – Forerunner

https://forerunnerventures.com/team/kirsten-green/

 

Chetan Puttagunta – Benchmark

https://www.linkedin.com/in/chetanputtagunta/

 

Shana Fisher – Third Kind

https://www.crunchbase.com/person/shana-fisher#section-overview

 

Mamoon Hamid – Kleiner Perkins

https://www.kleinerperkins.com/people/mamoon-hamid

 

Tony Florence – NEA

https://www.linkedin.com/in/toflorence/

 

Mike Volpi – Index

https://www.indexventures.com/team/mike-volpi

 

Roger Ehrenberg – IA Ventures

https://www.crunchbase.com/person/roger-ehrenberg

 

Matt Cohler – Benchmark

https://www.linkedin.com/in/mattcohler/

 

Aydn Senkut – Felicis Ventures

https://www.felicis.com/team/aydin/

 

Hans Tung – GGV Capital

https://www.ggvc.com/team/hans-tung

 

Active Early Stage Investors in NY based companies (Jan ’17 to Aug ’18)

In preparation for an event that we run on a regular basis, called Fundraising Workshop, wanted to provide an update on some of the most active early stage VCs (Venture Capital) who are investing in NY based startups.

A few items before providing you the information.

  • The data was pulled via CB Insights
  • The investors do not need to be based in NY but have to be investing in NY based companies
  • The date range was Jan 1 2017 to August 13 2018
  • It only includes venture capital firms and excludes accelerators, angels, corporates, etc.
  • CB Insights doesn’t provide data on who is leading the rounds, so the assumption with these firms listed, is that they participated in the round and not necessarily lead, a critical distinction when fundraising.  If you are fundraising, you need to do more homework to figure out is actually leading rounds.

The data is below.

Most active VCs who participate in sub $2M rounds, see below.  Many of the seed and pre-seed rounds are sub $2M in size, so if you are looking for firms who are active at this size, this is a good target.  Now, the data around pre-seed and seed is challenging since many of these rounds are not announced , which makes it is difficult for CB Insights to capture.  So this list is not comprehensive but I think it provides a lot of signal on the right firms to reach out to.

sub $2M rounds

Most active Seed VCs, see below.  In this query and unlike above, I didn’t put parameters on the size of the seed round.

Seed

Most active Series A VCs, see below.  Again, no parameters on the size of the round.  As I mentioned in beginning of the post, I am unable to query who is “leading” these particular round.  So some of these firms could be leading and other could be participating in them.

Series A

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
  • Social Impact Capital
  • 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 stage 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 VC 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.