Happy Thursday, everyone! Investor-writer Semil Shah is in charge this week while Connie is working on some sort of sand castle, we want to call it, down at the beach. If you’d like to reach out to Semil with questions or comments, you can usually find him on Twitter.
Top News in the A.M.
The venture firm First Round Capital, which celebrates its 10th anniversary this year, sat down with its vast troves of proprietary data, producing 10 very interesting findings, including that company alma maters matter far more than schools (though the two are invariably intertwined), and that female founders outperform their male peers. If you’ve missed the report, it’s here.
Leo Polovets on Branding, Data, and One Funky New Trend
By Semil Shah
In recent years, Leo Polovets has been busily building a brand for himself as one of four partners at Susa Ventures, a young, San Francisco-based venture firm that’s focused on data. Polovets — who most recently worked a senior software engineer at the L.A.-based global location data company Factual and before that, as a software engineer at Google (and who, earlier in his career, was the second non-founding engineer at LinkedIn) — has made meaningful strides toward that end, too. Actively blogging smart observations has helped. We caught up with Polovets recently to learn more.
Seed stage valuations — stable, going up, returning to earth?
Valuations have felt fairly stable over the last year. The one change I’ve seen is strong-but-not-spectacular founding teams that have built a [minimum viable product] in four to eight weeks and are trying to fundraise at high ($7 million-plus) caps. To me, that feels like way too high of a valuation for a month or two of work. I didn’t see this pattern 12 to 24 months ago, but I’ve seen it about a dozen times in the last six months.
Without much M&A these days, how does Susa think about exit profiles and returning a fund when liquidity is rare?
We think about it a bit, but it’s a lower priority concern — at least for now. First, I think seed funds have more opportunities to sell stock in later funding rounds. It’s probably much easier for us to sell some seed stock during a Series C than it is for a Series D investor to sell their stock in a Series E. Second, I think this is an area where the market will likely figure something out. If there’s a true liquidity crunch, someone will come up with a transferable financial instrument, or a fund that buys out seed fund stakes, or something else that will address the problem. Finally, I think it’s hard to predict how liquidity will look in 5 or 10 years, which is when funds that started in the last few years will be reaching their conclusion.
You’re quite active on Quora. Are founders reaching out to you via that network?
I’ve had a few founders reach out to me on Quora, but not many — perhaps one founder every few months. My blog has turned out to be a much better source of deal flow. I get three to ten leads from that every month.
I think the real value of blogging/tweeting/writing on Quora is less about explicit deal flow and more about creating a brand. Folks like you and Tomasz Tunguz and Jason Lemkin have done a great job in this department. As capital becomes more commoditized, especially at the seed stage, it becomes more important for investors to stand out from the crowd. My sense is that five years ago, having strong deal flow was one of the keys to being a great seed investor; now it’s more about getting an allocation in oversubscribed rounds — and a big part of that is just having people know who you are.
Susa focuses on companies who create data moats. In a world where downstream investors want to see revenue, what’s the appetite for data startups that will take time to make money?
The nice thing about data moats is that they’re usually built up as a side effect of growth and revenue, so monetization doesn’t need to be deferred. For example, if a startup is building an accounting tool, and the expense data being collected can be used in interesting ways, the founders are not going to say, “Ok, we need to make the product free so that we can collect more data.” Instead, they’re going to keep iterating on the product, improving the onboarding, exploring new growth channels, and so on. More and more people will find the product, use it, love it, and pay for it, and as a side effect the data moat will become stronger.
One angle to data that I think is interesting is that it can provide some downside protection. VCs and founders generally swing for the fences, but it’s nice to know there are some exit options if a company’s plans don’t pan out. For products with a strong team, potential acquihires from companies like Google provide some downside protection. For products with network effects, sometimes an acquirer will want to buy a failing company just to get access to its customers and network. I think data moats can provide another acquisition asset, because data can have a lot of value to the right buyer.
Finally, I think having data moats provides great optionality for companies and, by extension, for investors. Having a data moat makes it easier to defer revenue if desired because focusing on growth increases the strength of the moat faster, but it also makes it easier to start charging because having a data moat and features/products built on top of that data creates a lot more stickiness and lock-in — and fewer alternatives for customers who are reluctant to pay.
Securing Series A funding is much harder these days. As a seed investor, what do you coach your founders to anticipate?
My main pieces of advice are: 1.) Budget four to six months of runway to raise a Series A. If you need 12 months to hit good metrics, raise enough capital for 16 to 18 months so that you have time to raise money at the end. 2.) Budget time for hires to become effective. If enterprise sales will take six months to close, and you have to raise more capital in 12 months, then it’s probably pointless to hire salespeople in month eight. Hire a salesperson in month five or raise more runway in the first place.3.) Figure out what milestones you want to hit for your next round and work backward to figure out how much you need to raise. For example, for most SaaS companies, $1 million [in annual recurring revenue, or ARR] is the minimum viable revenue for a Series A. When deciding how much to raise, figure out how much capital you need to get to $1 million ARR; don’t just pick an amount to raise because it sounds reasonable or because it’s how much your friends raised. 4.) Don’t let money in the bank tempt you into spending faster than you should. Spend as slowly as possible until you’ve found product/market fit.
Droom, a year-old, Gurgaon, India-based online used car marketplace, has raised $16 million in funding led by the Mumbai-based venture firm LightBox Ventures and the Japanese internet firm Beenos. Inc42 has more here.
FreedomPop, the four-year-old, L.A.-based U.S. wireless carrier startup that has been building a business based on completely free voice and data services, has raised $10 million in funding from two strategic investors: the pan-Asian mobile carrier Axiata and an unnamed U.S. tech investor. The company has now raised $59.3 million altogether, shows Crunchbase. TechCrunch has more here.
G2 Crowd, a three-year-old, Highland Park, Il.-based platform for users to share reviews about specialized business software, has raised $7 million in Series A funding led by Pritzker Group Venture Capital, with “significant participation” from earlier backers Chicago Ventures, Hyde Park Venture Partners, company chairman Godard Abel, and G2 Crowd’s own executives. Business Insider has more here.
GitHub, the seven-year-old, San Francisco-based company that says it hosts the largest community of software developers and projects on the web, has raised $250 million at a $2 billion valuation led by Sequoia Capital. Other participants in the Series B round include Institutional Venture Partners, Thrive Capital and Andreessen Horowitz, which had provided GitHub with$100 million in Series A funding back in 2012. Venture Capital Dispatch hasmore here.
GoButler, a months-old, New York-based startup that promises users access to its staff of “Heros,” who act as personal assistants, has raised $8 million in Series A funding led by General Catalyst Partners, with participation from Lakestar, Rocket Internet’s Global Founders Capital, Slow Ventures, BoxGroup, Sound Ventures, and Cherry Ventures. TechCrunch has more here.
PicMonkey, a three-year-old, Seattle-based photo editing web app, has raised a whopping $41 million in growth equity investment (its first institutional round) from Spectrum Equity. TechCrunch has more here.
Seedrs, a six-year-old, London-based equity crowdfunding platform, has raised a $15.6 million (£10 million) Series A round led by Woodford Patient Capital Trust and Augmentum Capital. Seedrs had previously raised $7.2 million from Faber Ventures and its own crowdfunding campaign. More here.
Tictail, a three-year-old, New York-based platform that helps retailers set-up commerce stores and combines the brands into a single, unified marketplace, has raised $22 million from earlier backers, including Creandum, Thrive Capital, Balderton Capital and Acton Capital. TechCrunch has more here.
Thrive Market, a two-year-old, L.A-based company that sells users $60 annual memberships to shop for healthful products, has raised $30 million in Series A funding led by Greycroft Partners, with participation from Scripps Network, CAVU, Powerplant Ventures, and celebrity investors, including Justin Timberlake, Toby McGuire, and Demi Moore. TechCrunch has more here.
Truecaller, a six-year-old, Stockholm, Sweden-based company whose caller ID app let’s users see who is calling and to block calls, is looking to raise around $100 million at a $1 billion valuation, reports TechCrunch, which says Morgan Stanley has been hired to lead the process. To date, the company has raised $80 million, shows Crunchbase. Its backers include Atomico, Kleiner Perkins Caufield & Byers, Sequoia Capital, Access Partners and Open Ocean. TechCrunch has the scoop here.
Sandi MacPherson, founder of the social network Quibb, has launched an initiative that asks conference organizers to ensure that half their panelists are female speakers. She has a growing list of 1,100 women leaders at companies like Google, Facebook, PayPal, and Shopify to make it easier for them, too. Fast Company has more here.
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