StrictlyVC: August 4, 2015

Happy Tuesday, dear readers! Yesterday’s newsletter wound up in many of your spam boxes for some reason. If you wanted to catch yesterday’s issue, including our interview with Twitter persona Startup Jackson, it’s here. In the meantime, investor-writer Semil Shah is in charge of our columns for another week or so while Connie brushes up on her skateboarding. If you have questions or comments, you can find him right here on Twitter.

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Top News in the A.M.

Apple is reportedly in talks to launch its own virtual network service in the U.S. and Europe.

Microsoft‘s offshore profits have surged past the $100 billion mark.

Samsung Electronics said yesterday that it will create a 100 billion won ($85.8 million) fund to compensate cancer-stricken workers and their families, and to help prevent more of the same at its chip and display factories.

Twitter‘s shares dropped yesterday to their lowest level since the company’s November 2013 IPO, sparking takeover talk.

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Notation Capital on Life as a Pre-Seed, East Coast Fund

By Semil Shah

In February, Nicholas Chirls and Alex Lines, who previously helped develop companies at the startup studio Betaworks, closed their first fund with just $8 million dollars. Their Brooklyn-based firm, Notation Capital, calls itself a “pre-seed” investor. We caught up with Chirls recently to learn more, and see how things are going.

How do you manage to run Notation Capital full-time despite it being a small fund  and therefore earning lower fees?

In order to pay ourselves modest salaries, we operate the fund using a budget rather than the typical 2 percent yearly management fee. Fees remain effectively equivalent to 2/20 funds over time, but the budget allows Alex and myself to front-load some of the management fees. It works well for very small micro-funds and is in many ways more transparent than traditional 2/20 funds because management fees tend to obscure other fund expenses like legal and fund admin, among others, [that limited partners], especially individuals, often don’t realize they’re paying other fees in addition to the management fee. Alex and I run Notation Capital extremely lean; it’s just us, we have a small office in Brooklyn, and although I previously would have scoffed at VCs comparing their new funds to startups, there are no doubt some similarities.

Do you have plans in place to follow-on in your portfolio as companies raise more money?

So this is a really tough question for funds of our size that take a relatively concentrated approach to portfolio construction. (For us, that means approximately 30 to 40 companies in the fund.)

There are a couple of ways to approach this question. The first approach doesn’t save any for follow-on rounds out of the core fund, and instead focuses on writing relatively larger checks in order to obtain higher initial ownership. As companies raise additional financing, especially those that break out, there may be opportunities for the fund to structure pro-rata SPVs either with [our] existing LP base or on platforms like AngelList. It’s important to note that for non-institutional funds — Notation is a mix of institutions and non-institutions — that traditionally have a more complex LP base, structuring these SPVs can be super complicated and potentially riddled with conflict, so this can be a tough strategy in practice to execute.

The alternative, and slightly more conservative approach, is to write relatively smaller initial checks earning less initial ownership with the intention of saving meaningful pro-rata to maintain ownership through the seed, and potentially Series A out of the core fund.  We’re still only 6 months into operating our first fund, so in many ways we’re still refining our strategy, but initially we’re leaning towards higher initial ownership with less reserved for pro-rata.

Give us a sense for what valuation prices are like for pre-seed, seed, and seed extension + A rounds in New York and the East Coast more broadly.

Pre-seed valuations are around $1 million to $3.5 million. Seed valuations are between $4 million and $8 million. And A round valuations are between $10 million and $25 million-plus.

Have you had founders in Silicon Valley approach you for pre-seed funding yet?

We have, mainly because we’ve worked with quite a few founders in Silicon Valley at previous firms and companies. The concept of pre-seed, which is really just what we considered seed a few years ago, is quickly becoming a regular part of startup vocabulary. So positioning ourselves as one of the newer pre-seed funds in NYC has helped to tell our story. At the moment, we’re focused on building a community of founders specifically here in NYC, but that will change as our strategy evolves and our firm grows.

Is the plan to keep Notation small, or to eventually manage more funds?

This is the first of a series of funds for Notation Capital. That doesn’t mean we’ll raise significantly larger funds and move up the stack. Our bread and butter has and always will be working with highly technical founders at the infancy of an idea. What that means is that future funds will be larger in order to give us the flexibility to make meaningful follow-on investments out of the core fund and maintain ownership targets as the companies we work with mature. Our hope is that if we do it right, we’ll be working to build Notation Capital for years and decades to come.

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New Fundings

Beat the Q, a four-year-old, New South Wales, Australia-based pre-ordering and payments company, has raised $5 million in Australian dollars ($3.7 million) from the regional venture firm Reinventure, with participation from Exto Partners. More here.

Duetto, a 3.5-year-old, San Francisco-based company whose SaaS applications help hotels forecast demand, set prices and manage distribution, has raised $30 million in funding led by Icon Ventures. Other participants in the round include earlier backers, including Accel Partners, Battery Ventures, Altimeter Capital, and individual investors like Salesforce founder and CEO Marc Benioff.

FEM, a three-year-old, L.A.-based personalized video engagement platform, has raised $3 million in seed funding from Javelin Venture Partners, MESA Ventures and The Walt Disney Company via its Disney Accelerator. Venture Capital Dispatch has more here.

Mandae, a year-old, Sao Paolo, Brazil-based shipping service (it resembles the U.S. shipping service Shyp), has raised $1.5 million in Series A funding from Monashees Capital, Valor Capital Group, and former DHL CEO Hans Hickler.

Panorama Education, a 2.5-year-old, Boston-based startup that surveys students, parents and teachers to collect actionable data, has raised $12 million in new funding led by Spark Capital and Owl Ventures, with participation from earlier backers, including Y Combinator, Google Ventures, and Mark Zuckerberg and Priscilla Chan’s Startup:Education. TechCrunch has more here.

Pickingo, a 10-month-old, Gurgaon, India-based on-demand delivery service, has raised $1.3 million in seed funding led by Rehan Yar Khan of Orios Venture Partners, with participation from Toppr.com cofounder Zishaan Hayath, both early investors in Ola Cabs. YourStory has more here.

Riffsy, a 1.5-year-old, San Francisco-based company whose GIF keyboard enables users to share and discover animated GIFs and videos, has raised $10 million in Series A funding led by Menlo Ventures, with participation from Cowboy Ventures, Signia Venture Partners and earlier backer Redpoint Ventures. The company has now raised $13.5 million altogether. TechCrunch has more here.

Seriously, a two-year-old, Finland-based mobile games maker, has raised $18 million in Series A funding led by Northzone, with participation from Korea Investment Partners and earlier investors Upfront Ventures, Sunstone Capital and Daher Capital. The company has now raised $28 million altogether. Venture Capital Dispatch has more here.

Tujia, a four-year-old, Beijing, China-based company that has been likened to China’s Airbnb, has raised $300 million at valuation north of $1 billion led byAll-Stars Investment, an investment fund run by former Morgan Stanley analyst Richard Ji. Other participants in the round included the serviced-apartment manager The Ascott, and earlier investors, including Ctrip.com. The WSJ has much more here.

Zeotap, a year-old, Berlin, Germany-based data platform that connects telecom operators with the app and advertising ecosystem, has raised $6.4 million in Series A funding from Capnamic Ventures, Iris Capital, numerous angel investors and previous backers. TechCrunch has more here.

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Exits

Advance/Newhouse is spending $500 million to acquire 1010data, a 15-year-old, New York-based company that provides cloud-based big data analytics for retail, manufacturing, telecom and financial services companies. The company had raised at least one, $35 million, round of funding from from Norwest Venture Partners, which reportedly sold its stake. Venture Capital Dispatch has the story here.

Microsoft has spent an undisclosed amount of money to acquire Incent Games, a three-year-old, Austin, Tex-based company behind a  “sales gamification” platform called FantasySalesTeam. FantasySalesTeam had raised $1.4 million from ATX Seed Ventures, Central Texas Angel Network, and Marvel Venture Partners, according to CrunchBase. TechCrunch has more here.

The venture-backed digital photo startup VSCO has acquired Cambridge, Ma.-based stealth machine learning startup Moving Sciences for an undisclosed sum characterized by VentureWire as “small” and involving just one employee (presumably founder Yuanzhen Li, who has a PhD from M.I.T.). More here.

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People

Michael Evans, a longtime executive at Goldman Sachs who left at the end of 2013, has joined Alibaba as its new president to lead its international business. Evans spent the last decade running Goldman’s Asian operations. TechCrunch has more here.

Facebook cofounder Dustin Moskovitz and his wife, Cari Tuna, are donating $25 million to GiveDirectly, a new nonprofit that gives extremely poor people cash instead of traditional aid, including in Kenya and Uganda. Forbes has more here.

The insane life of serial entrepreneur Sean Parker (a Business Insider special).

Tidal, the streaming music service owned by entertainment mogul Jay Z, is facing a wave of staff departures, reports Music Week. Zena Burns, for example, who had joined the company as its senior VP of label and artist relations, appears to have left in June after just two months on the job. More here.

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Jobs

Cue Ball Capital, the venture firm, is looking to hire two associates. Interested parties can send a resume and cover letter to thuque [at] cueball [dot] com. The jobs are in Boston.

StyleSeat, which helps independent beauty professionals manage their businesses (it just raised $25 million in Series B funding), is looking to hire a business development associate. The job is in San Francisco.

Versant Ventures, the healthcare investment firm, is looking for an investor relations and marketing manager. The job is in San Francisco.

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Data

China’s stock markets: Nearly 25 years of wild swings.

European tech companies raised €3.47 billion in venture capital in the second quarter: Where it went and what it means.

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Essential Reads

Uber drivers rallied by the company to testify in a lawsuit that they wanted to stay contractors have since changed their minds, submitting new court declarations saying they were misled about the difference between contractors and employees. (Maybe it’s no surprise that another “on-demand” startup, Eden, just opted to turn its contract workers into full-time employees. More here.)

Facebook is getting in on the (live event) action. Wired has more here.

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Detours

Surfing — on a dirt bike.

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Retail Therapy

Turntable kitchen timer.



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