Bill Gurley

Bill Gurley on the Newest Super Fund Trend

On Monday, the National Venture Capital Association and Thomson Reuters released some surprising data. Despite few opportunities to exit from their investments, 57 venture firms managed to raise $12 billion in the first quarter — more money than VCs have raised since the second quarter of 2006. More, just seven firms counted for nearly two-thirds of all that money, with four raising north of a billion dollars apiece.

“It’s not just the size of the funds but the velocity” at which VCs are returning to their investors, known as limited partners (or LPs), says an astonished Bill Gurley of the venture firm Benchmark. “The Kauffman fund said that billion dollar funds sucked, then everybody went out and raised billion-dollar funds.”

Gurley is referring to a 2012 Kauffman Foundation report that suggests venture capital isn’t a great place for institutions to invest, and that big venture funds are a losing proposition almost entirely.

According to the organization’s findings, which it based on its 20-plus years of investing in more than 100 venture funds, only 20 percent of its investments had generated returns that beat a public market equivalent as of 2012, and even then, the funds outpaced those public market indices by a measly three percent. Kauffman further found that only four of 30 venture funds that exceeded $400 million delivered better returns for investors than a small-cap common stock index.

What’s changed in four years’ time? As far as Gurley is concerned, not a thing. Gurley — whose firm raised one billion-dollar fund in the late ’90s and quickly reverted back to sub $500 million funds — says he doesn’t think big venture funds add up for anyone other than VCs, whose management fees typically equal two percent of a fund. “If you talk with an LP, you’ll hear that funds raised in times of scarcity perform the best, while those raised in peak [fundraising] moments don’t have the best returns. The only type of return that’s guaranteed is excessive fee income. You get that no matter what, which is a conflict, for sure.”

More here.

Benchmark’s Newest Partner, Eric Vishria, On Year One at the Powerhouse Firm

In July of last year, Eric Vishria, a longtime Opsware executive who became co-founder and CEO of the social browsing startup Rockmelt, joined the Sand Hill Road firm Benchmark as its fifth general partner. It’s an enviable position, given the reputation of the 20-year-old firm, which has backed Uber, Snapchat, and the publicly traded companies Twitter, Hortonworks and Zendesk, among many others.

At Benchmark, which famously sticks to its early-stage knitting, with recent funds all closing at $425 million, general partners also have an equal share in the firm. That’s rather unlike most venture firms, where older partners typically receive outsize economics (and younger partners often hightail it for greener pastures).

That’s not to say the work is easy, exactly. We talked with Vishria yesterday about his first year on the job. Our chat has been edited for length.

How’s it going one year in?

It’s been really amazing. Don’t tell entrepreneurs this, but it’s the best job ever. Every meeting you walk into, you’re learning something. You’re meeting with an entrepreneur, learning about a new space or idea . . . It’s just such an intellectually stimulating job. I find it very inspiring.

How do you keep from getting overly excited about the new ideas you’re seeing? We’d think that would be tricky at first.

I’ve now seen about 180 companies – I track it – and in the first few weeks, I was like, “Oh my God, all of these ideas are investable!” And they weren’t.

More here.

StrictlyVC: October 24, 2014

Good Friday morning, readers! We hope you’re in for a terrific weekend. Also, if you missed StrictlyVC yesterday (a few of you told us it landed in your spam boxes), you can check it out here.

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Top News in the A.M.

Airbnb is discussing a new round that could total more than $50 million and value the company at $13 billion, reports the WSJ, which says the company wouldn’t use the cash for itself but rather to allow investors to buy employee shares. The round hasn’t yet closed and the funding amount and valuation could still change, says the report.

The last legal hope of television streaming service Aereo was dashed yesterday.

Amazon‘s quarterly earnings report yesterday has Wall Street spooked. Bloomberg BusinessWeek has more here.

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Bill Gurley: Earlier Warnings are Making an Impact

Venture capitalist Bill Gurley appeared on CNBC’s “Squawk Alley” show earlier this week to clarify some of the comments he’d made in mid-September to the Wall Street Journal – comments that Gurley thinks were misconstrued in follow-on reports that confused risk with valuations. “I was talking about risk and I didn’t say a word about valuations,” said Gurley. “I don’t see radically insane valuations.”

Gurley went on to say that the pubic market is right now “more discerning” than the late-stage venture market, where investors are “cram[ming] almost unnecessary levels of capital into these private companies.” Gurley also told CNBC that he believes his earlier warning in the Journal is having a “positive” impact on the private market. Here’s Gurley, in his own words:

“It’s a four or five-year trend . . . of late-stage companies raising rounds that are larger than historic IPO rounds, and because there’s no capital intensity – we’re not buying stores, we’re not building factories – when you take that amount of capital and try and put it to use, the only way to do that is to increase your burn rate.

“The problem is this growth-at-all-costs mentality causes almost a subsidization of survival. It’s almost easier to execute unprofitably than profitably. So if I say, ‘Hey, go grow a company to $100 million,’ and one company is told they have to be profitable and the other is told they can lose $30 million, it’s much easier to do the latter. So I think we end up with more companies with higher revenue rates where their business models still may be open to question . . .

“I think the public markets are being more discerning than the late-stage private markets in terms of trying to figure out whether a company has a potential long-term business model and has the ability to generate profitability over the long term.

“[In fact,] I think having that conversation a couple of weeks ago has had two positive impacts. One, I’m starting to hear more and more people tell me at board meetings, ‘Hey, we’re talking about this; we’re thinking more about this. We’re going to be smarter going forward.’

“Second, in the public markets, you’re seeing some discernment. In the same week, [you’ll see] two companies go public and two delay because of ‘market conditions.’”

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New Fundings

51Talk, a three-year-old, Beijing-based online English language education service, has raised $55 million in Series C funding led by Sequoia Capital, says China Money Network. Other participants included earlier investorsDCM and Shunwei Capital founded by Lei Jun, founder of the smartphone maker Xiaomi.

Blockstream, a 10-month-old, Quebec-based company at work on a new way of transferring assets across multiple block chains (which work like digital spreadsheets shared by everyone in a decentralized network), has raised $15.8 million in funding, shows an SEC filing that was flagged by Coindesk. The filing names Reid Hoffman of Greylock Partners as a director. Talking with Coindesk, Blockstream’s CEO Austin Hill said the round is still open and that the company will provide more details once it’s complete.

Charlie, a 2.5-year-old, Chicago-based mobile app that promises to arm users with important information about their contacts right when they need it (like before a big meeting), has raised $1.75 million in seed funding led by Lightbank, with participation from Confluence Capital Partners, Hyde Park Venture Partners and several individuals.

DormChat, an Hoboken, N.J.-based geolocal communication service for college students, has raised an undisclosed amount of seed funding from ff Venture Capital.

Ello, the year-old, Burlington, Vt.-based social network that promises to keep advertising off its site, has raised $5.5 million in funding from Foundry Group, Bullet Time Ventures and FreshTracks Capital. Betabeat has more here.

ExecOnline, a 2.5-year-old, New York-based company that partners with schools to develop online executive education programs, has raised $5 million in Series A funding led by Osage Venture Partners, with Kaplan Ventures, Militello Capital, New Atlantic Ventures and others participating. The company has now raised $6.9 million to date, shows Crunchbase.

Fountain, a year-old, San Francisco-based company whose on-demand question-and-answer app addresses gardening and home-improvement questions (for now), has raised $4 million in Series A funding led by Shasta Ventures, with participation from First Round Capital. TechCrunch has more on the company — cofounded by Mint founder Aaron Patzer — here.

KouDai, a Beijing-based mobile e-commerce platform that recommends targeted products to users, has raised a whopping $350 million in Series C funding led by the Internet giant Tencent Holdings, according to China Money Network. Other investors in the round include Tiger Global Management and DST Global. The three investors also previously backed the now-public Chinese e-commerce platform JD.com. KouDai, which means “pockets” in Chinese, counts Chengwei Venture Fund, Matrix Partners, and Warburg Pincus among its earlier investors.

Luxe Valet, a year-old, San Francisco-based on-demand valet service, has raised $5.5 million in seed funding from Google Ventures, Sherpa Ventures, Redpoint Ventures, Lightspeed Venture Partners, Upfront Ventures, Foundation Capital, BoxGroup, Slow Ventures, Data Collective, Eniac Ventures, Rothenberg Ventures and others. VentureBeat has much more here.

Mogl, a four-year-old, San Diego-based loyalty rewards app, has raised $11 million in funding from Austin Ventures, Avalon Ventures, Correlation Ventures and Sigma West. The company has now raised at least $21.7 million to date, shows Crunchbase.

Oneflare, a 2.5-year-old, Sydney, Australia-based local services marketplace, has raised $1 million AUD (about $876,000), bringing its total funding so far to $1.5 million AUD (about $1.3 million). Investors include Equity Venture Partners, Sydney Seed Fund and The Strategy Group. TechCrunch has more here.

Phreesia, a nine-year-old, New York-based healthcare point-of-service platform, has raised $30 million in new funding led by LLR Partners, with participation from HLM Venture Partners and Ascension Ventures. The company has raised $72.7 million altogether, shows Crunchbase.

Portal Instruments, a new Cambridge, Ma.-based company that’s developing a computerized needle-free drug delivery system, has raised $11 million in Series A funding led by Sanofi, PBJ Capital, and a major, unnamed medical device company.

Slack, the five-year-old, San Francisco-based enterprise collaboration platform, is reportedly raising a new round of funding at a valuation of between $800 million and $1 billion, just six months after raising nearly $43 million. (To date, the company has raised $60 million.) Sequoia Capital and Kleiner Perkins Caufield & Byers are involved in the newest funding, says one report from TechCrunch. The company’s earlier investors include Andreessen Horowitz, Accel Partners, and The Social+Capital Partnership. More here.

Soft Machines, an eight-year-old, Santa Clara, Ca.-based semiconductor company, has raised $125 million in funding, including from two former senior Intel executives (Albert Yu and Richard Wirt); well-known chip entrepreneur and investor Gordon Campbell; Samsung Ventures; Advanced Micro Devices; and Mubadala, the Abu Dhabi investors backing chip manufacturer Globalfoundries. The WSJ has the story here.

Spring.me, a 1.5-year-old, Sydney, Australia-based social network that was previously known as Formspring, has raised $5 million in debt and equity, including from Right Click Capital, Tank Stream Ventures, Nextec Strategic Capital, and Rubicon Project founder Craig Roah. TechCrunch has more on how and why the company is rebranding itself.

TaskEasy, a three-year-old, Salt Lake City, Ut.-based company that provides on-demand exterior home services like leaf raking, said it has raised $7 million in Series A funding from Access Venture Partners, Grotech Ventures and KickStart Seed Fund. The company has raised $9.6 million to date, shows Crunchbase.

Telcare, a six-year-old, Bethesda, Md.-based company that develops cellular-enabled glucose monitors and a cloud-based companion system, has raised $32.5 million in Series C funding led by Norwest Venture Partners, with Mosaic Health Solutions and earlier investors Sequoia Capital and Qualcomm participating. The company has now raised $63.5 million altogether, shows Crunchbase.

Vestorly, a 2.5-year-old, New York-based content marketing platform for financial services professionals, has raised more than $2 million in seed funding from AlphaPrime Ventures, Formation 8, and Gaspar Global Ventures.

Zignal Labs, a three-year-old, San Francisco-based real-time media monitoring and analytics company, has raised $10.7 million in Series B funding from earlier investors, including Figtree Partners, Ross Investment Associates and company co-founder Jim Hornthal. The company has now raised $14.9 million altogether, shows Crunchbase.

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New Funds

Founders Circle Capital, a 2.5-year-old, San Francisco-based firm that buys back stock from founders, executives, employees and early backers, has raised $195 million across two funds, beating a target of $125 million, says the firm. More here.

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People

Microsoft co-founder Paul Allen is pledging at least $100 million to help fight the spread of Ebola, reports USA Today. The funding will go to the State Department to develop medevac containment units to evacuate health professionals from West Africa and to offer training, medical workers and equipment in Liberia, one of the nations hardest hit by the Ebola epidemic. (This video about the epidemic in Liberia should win an award. H/T: Matt Mireles.)

Nicolas Debock has joined Balderton Capital as a principal. He’ll focus largely on fintech, consumer-to-consumer marketplaces and SaaS. Prior to joining Balderton, Debock worked at XAnge, a Paris-based venture firm. He has also worked as the head of startup-relationships at La Poste, the French postal service, and at the IT and management consultancy Logica.

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Job Listings

Google is newly looking for a corporate development strategy manager.

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Data

Total funding to on-demand mobile services startups has hit $1.46 billion in the last four quarters, says CB Insights, which says nearly 20 deals per quarter in 2014 have been money invested into “Uber for X” type companies. More here.

A New York venture capital and funding report, by AlleyWatch.

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Essential Reads

Facebook introduces its first product that allows you to ditch your real name.

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Detours

Inside the crazy, and big, business of pet body shaming.

When introverts should avoid coffee.

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Retail Therapy

Holy smokes.

Bill Gurley: Those Earlier Warnings are Making an Impact

“Second, in the public markets, you’re seeing some discernment. In the same week, [you’ll see] two companies go public and two delay because of ‘market conditions.’”

Don’t Panic: On VCs and Bubble Trouble

Several of the country’s most prominent venture capitalists have sent the startup world into a hysteria in recent weeks. Bill Gurley of Benchmark kicked off the panic when in an interview with the Wall Street Journal, he lamented that companies have taken their burn rates to levels not seen since 1999 and noted that “more humans in Silicon Valley are working for money-losing companies than [they] have been in 15 years. . .”

Fred Wilson of Union Square Ventures weighed in the following day, writing at his popular blog: “The thing I like so much about Bill’s point of view is that he does not focus on valuations as a measure of risk. He focuses on burn rates instead. That’s very smart and from my experience, very accurate.”

Roughly a week later, Marc Andreessen decided to explain on Twitter why he agrees with both Wilson and Gurley. Using even more vivid language than his peers, Andreessen wrote that “when the market turns, and it will turn, we will find out who has been swimming without trunks on: many high burn rate co’s will VAPORIZE.”

The truth is that none of the VCs needed to broadcast their thoughts so pointedly. Gurley has been saying for years that there’s a problem with later-stage investing. It’s largely because his firm believes so strongly that there’s an inverse correlation between how much money an outfit accepts and the returns it produces that Benchmark continues to raise funds in the neighborhood of $425 million instead of raising more capital, which it could easily do.

It isn’t the first time that Andreessen has voiced concern over burn rates, either. Back in July, he warned entrepreneurs against “[p]ouring huge money into overly glorious new headquarters” and of “[a]ssuming more cash is always available at higher and higher valuations, forever. This one will actually kill your company outright.”

So why clang the alarm bell more forcefully now? Well, burn rates really are rising at later-stage companies, as Pitchbook data underscores. But it’s also worth remembering that while VCs might be friendly and respect one another, when it comes to business, they do what it takes to burnish their own brands. Surely Wilson, Gurley, and Andreessen are genuinely astonished by some wild spending on the part of startups, but they’re also competing with each other – in this case, about who first noticed that startup spending is out of control and who is the most disgusted by it.

The warnings are also – and perhaps primarily — a defensive move. A flood of late-stage money has poured into the venture industry. While that’s been good for VCs in some cases – Tiger Global and T.Rowe Price are among other newer entrants to mark up investors’ earlier deals – that capital isn’t as welcome as it might have been a year ago, given that it just keeps coming. (As Fortune reported last week, Tiger Global is raising another $1.5 billion fund, just five months after raising its last $1.5 billion fund. It’s hard for anyone to compete with that kind of money, even Andreessen Horowitz, which has raised roughly $4 billion since launching five years ago.)

Gurley and Andreessen have grown increasingly transparent about their disdain for some newer funding sources, in fact. In April, in one of Andreessen’s famous series of tweets, he warned founders to be “highly skeptical” of growth-stage investors outside Silicon Valley, saying they offer founders “breathtaking high-valuation term sheet[s],” then convince the teams to “go exclusive and shut off other talks,” which limits founders’ options going forward.

On Saturday, presented on Twitter with a year-old chart that suggests rising burn rates don’t necessarily point to a bubble, Gurley tweeted: “[C]hart also doesn’t include 2014 (major uptick) and new sources late stage $$ (which is the majority of funding).” He then added, “I never said there was a valuation bubble — I just said burn rates and ‘risks’ are quite high.”

You can’t blame Andreessen, Gurley or Wilson for commenting on the market. These are frothy times, and if trouble is just up ahead, it’s better to be on record for acknowledging some of the risky behavior they’re seeing.

If in the meantime their warnings prompt more companies to eschew these “new sources of late stage money” zeroing in on them, well, that’s probably okay, too.

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Venture Heavyweights Sit Back as Deal Sizes Soar

It’s been a banner week for a number of Internet companies.

Last Wednesday, social network Pinterest acknowledged closing on a $225 million round that valued the company at $3.8 billion. Shortly thereafter, AllThingsD reported that Snapchat, the messaging app, is now weighing a $200 million investment round that would value the company at $3.5 billion. And just yesterday, NextDoor, a social network for neighbors, raised $60 million in fresh capital.

But the reality is that some of today’s biggest venture heavyweights have pulled back dramatically on late-stage deals.

Two weeks ago, during a visit to Andreessen Horowitz, Marc Andreessen told me his firm has “done almost no growth investments in the last year and a half.”

Yesterday, Ravi Viswanathan, who co-heads New Enterprise Associates’ Technology Venture Growth Equity effort, told me much the same. “If you chart our growth equity investing over the last few years, it’s been very lumpy,” said Viswanathan. “Last year, I think we did four or five growth deals. This year, I don’t think we did any.”

That’s saying something for a firm that is right now investing a $2.6 billion fund that it raised just a year ago.

Andreessen attributes his firm’s reluctance to chase big deals to an influx of “hot money.” The partnership is “way behind on growth [as an allocation of our third fund],” Andreessen told me, “and that’s after being way ahead on growth in 2010 and 2011, because so many investors have come in crossed over into late stage and a lot of hedge funds have crossed over, which is traditionally a sign of hot times, hot money.” He added, “What we’re trying to do is be patient. We have plenty of firepower. We’re just going to let the hot money do the high valuation things while it’s in the market. We’ll effectively sell into that.”

That’s not to say later-stage deals don’t have their champions right now. At this week’s TechCrunch Disrupt conference, venture capitalist Bill Gurley of Benchmark told the outlet that “a global reality is that some of these companies have systems, they have networks in them, that cause early leads to always play out with really huge platforms.” People “laugh or write silly articles about the notion of a pre-revenue company having a very high valuation,” added Gurley. But “if you talk to some of the smartest investors on Wall Street, or go talk to guys like Lee Fixel or Scott Shleifer at Tiger, they’re looking for these types of things. They’re looking for things that can become really, really big.”

Still, Viswanathan’s concerns sound very similar to Andreessen’s when I ask him why NEA has pulled back so markedly from later stage investments.

“It’s an amazing tech IPO market, and that drives growth,” Viswanathan observed. “But I’d say the growth deals we saw last year [were] elite companies getting high valuations. There are still great opportunities out there. But right now, it feels like there are high valuations even for the lesser-quality companies.”

Photo courtesy of Corbis.

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