Crunchfund

Quick Chat with Scalus Founder and CEO Kristen Koh Goldstein

By Semil Shah

Scalus, a five-year-old, San Francisco-based maker of workflow and collaboration software, was born out of necessity, says founder and CEO, Kristen Koh Goldstein, a former investment analyst turned entrepreneur. We recently caught up with her to learn more.

With Scalus and a company you founded previously, BackOps, you seem to have developed a passion and expertise around building software and networks for remote workers — how did that all come to be?

It’s fueled from a place of personal experience. After 9/11, I left Wall Street to learn operational finance and accounting at startups. Then life happened. I became a mom. And I learned firsthand the challenges of being a mom and a professional. So I started BackOps, a back office service employing skilled moms who work from home between school dropoff and pickup. The business grew quickly, doubling revenue every year for four years, so we ended up needing to develop software to clear the hurdles to scaling our business and Scalus was born.

Our corporate mission is to prove that the future of work includes workplace flexibility for all. Our social mission is to get a million parents back to work by empowering them to be productive at work and engaged at home.

Speaking of remote workers, some of them are likely to be on contract. Have you been following the contractor versus full-employee debate as it relates to the on-demand sector? Any reactions?

The labor laws haven’t caught up with the changing face of the workforce. The Millennial generation approaches employment differently than its predecessors. Companies look more like Hollywood productions or real estate development projects. The line between “internal” and “external” becomes much more blurred in this environment, where contractors can often have the same longevity and close working relationships as internal employees, especially across departments.

Philosophically, I believe it’s important to make a commitment to people who commit to you. At BackOps, where I’m the chairwoman, my perspective has always been that unless you have an active income source elsewhere (you’re working for others), you are an employee of the company, even if just part-time on a temporary basis.

What’s your point of view on the increased attention paid to having more women in VC and investing roles in the Valley? Are there more women quietly doing this than we know about, or is it still pretty dismal? If so, what can change it quickly?

In angel investing, there have always been a lot of women funding and supporting early-stage companies. Shawn Byers, a prolific investor in female-led companies, is probably the only member of her family [which includes her husband, Brook Byers of Kleiner Perkins and their sons Blake Byers of Google Ventures and Chad Byers of Susa Ventures] who you haven’t heard about. I think it’s quite possible that Shawn may end up backing just as many startups as Brook, Blake, and Chad. Full disclosure: Blake Byers is our biggest champion at Google Ventures, so we’re a big fan of the whole Byers clan.

I am thrilled that trailblazers, including Helena Morrissey and Sukhinder Singh Cassidy, are pushing forward the discussion about getting more women in the boardroom, which is a positive change toward getting more women in VC. I am also so grateful to the countless women quietly working behind the scenes, including Aileen Lee. Hopefully, more companies, especially startups where like-think reigns, will start diversifying their boards, which will increase the demand for female VCs, who will in turn invest in a broader range of founders who will seek diverse boards.

You’re an active angel and seed investor but keep a relatively low profile. Is that on purpose or all part of the plan?

It’s on purpose. I have been listening, learning, and waiting for the remote worker movement to come center stage. When the time is right to talk about what it means to empower everyone across an organization to determine the way that they work, you’ll hear a lot more from me.

There’s Something About Abie Katz

Abie Katz, 24, is halfway through his second week as an associate at the tony Sand Hill Road firm August Capital. Why is that notable? Well, for one thing, the 20-year-old venture firm doesn’t really hire associates. Also, despite his age, this isn’t Katz’s big break into the venture world. He has already spent more than two years at the associate level, having joined the seed-stage firm CrunchFund in 2012.

Katz has also managed to attract profiles in Wired, which likened him to Mark Zuckerberg in 2008 just two months after he’d cofounded a company, and TheNextWeb, which later reported on his decision to leave college to become a venture intern. (That’s a feat. No offense to interns, but who write about interns?)

What is it about Katz? We talked with him last week to find out. Our chat has been edited for length.

How does a 17-year-old student with a fledgling company get compared to Mark Zuckerberg in Wired?

That was the greatest fluke of my life. The business that [reporter Brian Chen] wrote about never ended up launching. We just hit it off and he decided to interview me and gave [the story] an inflammatory headline that was very positive — though undeserved. I thought the press might be helpful. It was so many years ago now, it’s more of an artifact.

Nothing relating to you is an artifact yet. But what is it about you that so enchants reporters? Why did TheNextWeb care that you were leaving college? Why am I interviewing you right now?

[Polite laughter.] I met [TheNextWeb] reporter at [TechCrunch] Disrupt. I asked for directions and we ended up getting dinner in a group and she thought that I had an interesting story.

For the most part, I like to be more behind the scenes in venture capital. I’m still new to my career and realize I have a lot to learn. I also think entrepreneurs should really be the center point for mass media. But I’m glad that things like StrictlyVC are out there because I think it’s a really interesting industry.

How did you break into VC as a college drop-out?

I went to college for a one-and-a-half years at Claremont McKenna College, then took some time off to intern at a [San Diego startup]. I’d find small business initiatives that weren’t in anyone’s purview and [try making something happen]. I [later] reached out [Merus Capital cofounder] Sean Dempsey, a Claremont alum, and offered to do free diligence work up in San Francisco. He had me look at three companies, I worked as hard as I could and tapped into whatever network I had at the time, and Merus decided to bring me on as an intern.

Did you think about finishing up your degree?

After about six months, Merus encouraged me to go back to school but the next semester, I heard that CrunchFund was looking to hire an intern. I’d met [CrunchFund cofounder] Pat Gallagher while at Merus; he and [partner] Mike Arrington are also Claremont alums, so I came back to San Francisco for the summer to work for them. I thought I’d be with the firm through the end of 2012 as an intern . . . Thankfully, they thought it was a good idea to bring me on full-time.

How does one start drumming up deal flow from scratch?

It really helped [to have] the network and reputation of CrunchFund. I was able to tap into the partners’ networks and, over time, build my own. I also relied on a combination of AngelList and working with accelerators and going to demo days. The rest was a hodgepodge of more thesis-driven research, where I’d do a deep dive into an industry to learn about specific white spaces and just read a lot.

You say you sourced 21 investments for CrunchFund over two-plus years, including the startup Kinnek. Now you’ve been recruited into August, a very different firm.

Yes, and I’m taking in as much information as possible and trying to get familiarized it. There are definitely differences between the firms in terms of the style of investments they make and their size. CrunchFund has a model similar to SV Angel: a small team making about 40 investments a year through checks that are typically between $100,000 and $250,000 and occasionally as much as $1 million. August is more traditional, with a long history of leading rounds and being very hands on. It’s a different style.

It’s a very different career arc.

In the venture business, especially coming from a nontraditional background, you need to find that unorthodox foot in the door. From there, things can kind of snowball.

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VC Patrick Gallagher on Where CrunchFund is Shopping Now

By Semil Shah

When college friends Patrick Gallagher and Michael Arrington came together in 2011 to start CrunchFund, Arrington — who’d founded the media property TechCrunch in 2005 — brought contacts, startup smarts, and a talent for drumming up attention to the table. Gallagher brought his own sizable network and institutional investing know-how, having been a partner with VantagePoint Ventures and, before that, an investor at Morgan Stanley Venture Partners.

The mix appears to work. The pair have funded hundreds of companies to date, including Uber and Airbnb. They’re also investing a second fund that closed earlier this year, having reportedly closed on about $30 million, or roughly the amount of their debut fund.

This week, I asked Gallagher about that second fund via email. We also talked about Arrington, who made Seattle his primary residence back in 2010, a year before he sold TechCrunch to AOL. Our conversation follows:

When most people think of “CrunchFund,” they think of Mike Arrington. How often is Mike in the Valley these days, and how have you observed him change as he transitioned from a writer and blogger to a full-time investor?

These days, Mike spends at least half his time in the Valley, where around 70 percent of our investments are.

When we started CrunchFund, one of the things that really resonated with Mike was the ability to meet with and interact with entrepreneurs at the earliest stages of a company’s life. Those were the types of companies he initially wrote about when he started TechCrunch and what he enjoys the most. Mike has always had a good sense for consumer start-ups but when you’re writing about a company, the opportunity cost is primarily your time to write the article. When you make an investment, the opportunity cost is much higher in terms of dollars and time. The biggest change I’ve seen in Mike since he became a full-time investor is his investment evaluation process. He now spends significantly more time trying out products and getting to know the company founders before he’s ready to sponsor an investment.

CrunchFund’s smaller bet in Uber’s [$37 million, December 2011] Series B round is now of epic status. Walk us through how that deal came together. Was the partnership divided about making such an investment as a seed firm?

CrunchFund is primarily a seed and early stage fund, but we allocate up to 20 percent of our fund for later-stage investments in companies we think can still generate venture level returns, and these have included Uber, Airbnb, Square, Skybox Imaging, Bluefly, Redfin, and a few others.

Mike had written about Uber when it had first launched and had been friends with the company’s CEO, Travis [Kalanick], since 2006. We were both loyal users of the service, and when we found out that the company was raising its Series B, we asked if we could invest a small amount, and they graciously gave us an allocation.

Tell readers more about what you focus on as an investor, including the B2B side and infrastructure side. I think founders want to know more about CrunchFund’s appetite for startups.

I started my career in the venture business in 1997 at Morgan Stanley Venture Partners. We were the venture arm of this massive financial services firm that spent over $1 billion on IT, so I’ve spent most of my career investing in enterprise-facing companies and I spend the majority of my time focused on them at CrunchFund. About 40 percent of our investments are enterprise-facing companies, including Digital Ocean, Mesosphere, Branding Brand, Abacus Labs, Feed.fm, Rocketrip, Layer and many others. I see a ton of innovation in the enterprise, from the infrastructure inside the datacenter to the software people are using to manage their businesses day to day.

I’m also a big believer in companies that sell to [small and mid-size businesses]. I was on the board of Constant Contact through its IPO and have seen firsthand that you can build a large business selling to this segment.

For enterprise infrastructure deals, which don’t feature as many “party” rounds as do consumer deals, how does a smaller fund like CrunchFund make a dent when all the big firms want to max their ownership?

CrunchFund typically invests $100,000 to $250,000 as an initial investment, and we normally don’t lead deals, so it’s pretty easy for us to fit into most rounds. We’re additive to any investor syndicate, and we focus on providing specific help with media and PR positioning and
and introductions for larger follow-on rounds of financing through our network. We also open up our networks for things like business development, recruiting, and customer introductions. For us, because our fund size is still relatively small, investments in this range are meaningful.

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Erin Glenn, Alphaworks’s New CEO, on Waiting for the SEC

Any new CEO has a lot to contend with, like getting to know employees and clarifying the business’s strategy. Erin Glenn, who recently joined the New York-based crowdfunding platform Alphaworks, has to worry about something else, too: the SEC.

Launched by Betaworks in February of this year, Alphaworks is a white label platform that obtains stakes in companies via seven venture “sponsors” that leave open between $100,000 and $250,000 of certain startups’ rounds. The companies then sell the equity directly to their own “communities,” in turn making those customers even more loyal.

Glenn — who spent the previous four years as CFO of the gaming company Kixeye — sees a day when the model is used across numerous industries, though Alphaworks’s clients so far have been consumer-facing Internet companies with impassioned members.

Gimlet Media, a New York-based podcasting company, is a prime example. Earlier this fall, when the company was looking to top off roughly $1 million in venture funding, it agreed to crowdsource some of the round to its listeners. Alphaworks’s nine employees sprang into action, posting a deal page for Gimlet, reformatting its pitch deck, helping gather audio testimonials and, not last, helping coordinate media coverage to drive interest in the campaign.

The plan worked. Gimlet’s $200,000 crowdfunding campaign was fully subscribed within three hours. (In fact, the company wound up accepting $275,000.) Alphaworks is now represented on Gimlet’s cap table as a special purpose vehicle whose investors have delegated their voting, follow-on, and information rights to Alphaworks.

Still, not everyone who wanted to back Gimlet could — not even close, says Glenn, who estimates that just 25 percent of those who began the registration process were able to complete it. The others didn’t qualify as accredited investors. And until the SEC finalizes a key rule in the now two-year-old JOBS Act that was designed to let small businesses raise money from virtually anyone over the Internet, the non-accredited will remain locked out of the process. (As recently as last week, the agency’s chair, Mary Jo White, suggested it’s in no rush to make binding decisions about the rule, called Title III.)

“It’s frustrating,” says Glenn of the continued delays. “There’s a concern about ‘frothiness’ in the market right now. But in a hot market or a down market, the timing is always going to be difficult.”

Alphaworks has a uniquely challenging mandate, too. While other crowdfunding platforms cater to wealthy investors in search of investment opportunities, Alphaworks’s focus on turning a company’s fans into owners means it’s catering to very different end users. Not only do many of them lack the financial muscle required currently by the SEC, but some need to be educated on startup investing. (Indeed, Alphaworks, which is backed by $1.5 million from Betaworks, SV Angel, and Lerer Hippeau Ventures, has organized just four campaigns to date.)

Glenn — who says that Alphaworks is sticking to its original mission — isn’t discouraged. As far as she’s concerned, its patience today will pay big dividends later.

She notes that Gimlet saw nearly triple the demand for what it raised, taking into account the roughly 75 percent of registrants who were forced to abandon the process along the way. “That kind of demand is a strong signal for Gimlet to talk about,” says Glenn. “But it should also be a signal to the SEC. People want to participate in the growth of their favorite companies. They also want to be responsible for their own financial destiny.”

And Alphaworks, she suggests, will be waiting to help them.

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