Indiegogo

IVP’s Sandy Miller on Big Banks: They’re “Ideal” Competition

Later this year, the peer-to-peer student loan startup Social Finance (SoFi), will likely go public. If it does, the company – whose marketplace enables college alumni to provide student loans at better rates – will join a line of online lenders in the portfolio of Institutional Venture Partners with similar plans. (IVP’s other investments include OnDeck, the small business lender, which went public in December, and Prosper Marketplace, a peer-to-peer lending platform that appears to be laying the foundation for an IPO later this year.)

Last week, we caught up with Sandy Miller, a longtime general partner at IVP who once managed 3i’s late-stage technology business, as well as cofounded the investment bank Thomas Weisel Partners. We talked about just how many online lending bets the firm might make – and whether those companies could wind up competing head-on in the not-too-distant future.

SoFi just raised $200 million. It’s reportedly valued at $1.3 billion and poised to go public. But student loans are just the beginning for the firm. Is IVP at all concerned that its portfolio companies will start knocking into each other?

All of our investments are completely different businesses. OnDeck is lending to small businesses, a market that the banks have really abandoned. Meanwhile, SoFi lends primarily to relatively recent, well-educated college graduates, refinancing their student loans as a next step in these young professionals’ careers. We don’t know what the businesses will do [going forward], but online lending is an enormous category; there’s plenty of room [for everyone].

Everyone is so confident that big banks like Wells Fargo will completely cede this territory. Why?

Regulation and litigation from the financial crisis is part of it. It’s also a matter of technology. Most of the big banks have been built up through a series of acquisitions, and all are dealing with legacy architectures and cumbersome bureaucracies. Because their cost structure is so high, they can’t compete. They reflexively look at small loans as not profitable, whereas small loans can be very profitable for younger, nimble companies using advanced technology.

IVP has placed numerous bets on online lending companies. Are you actively looking for more?

We have four online lending companies: OnDeck, Prosper, SoFi, and Opportune, which focuses on the underbanked Hispanic community. There’s nothing imminent [in terms of new investments], but we’re really happy with the four companies we’ve backed and we think that finance overall is one of the most attractive areas of new investment because of several factors. First, it’s an absolutely massive category. Also, it’s all digital, compared with some companies that have to ship stuff that’s delivered to your door. Third, the big banks are ideal companies to have as competitors for the reasons we’ve just discussed.

You say it’s all digital, but people still need to go to the bank on occasion. Do you think we’ll see more of these lenders lease space for marketing and other business purposes, as we’re seeing happen with online retailers?

A lot of businesses do benefit from both an offline and online presence. Opportune has locations in targeted geographies. The others [of our portfolio companies] don’t have any plans [to create storefronts] as far as I know, but the concept is a valid one and I do think more tech businesses will be marrying offline and online.

IVP has finance companies beyond online lending. How much of your time do you think you’ll spend looking at and potentially investing in new finance companies in 2015?

We don’t really know until the end of each year. We just look at the best companies. We’re roughly half consumer and half enterprise, and finance cuts across both. We have Personal Capital, for example, an online wealth management platform; and Klarna, for online payments in Europe; and the leading crowdfunding site Indiegogo. There’s quite a range.

Is IVP looking at international opportunities, or do your U.S.-based finance companies have you covered globally?

We generally focus here, but we do find companies in northern Europe that seem to meet our criteria. Regulations vary by country, even state by state in the U.S., so [for these U.S.-based companies to branch out globally] isn’t a trivial task. At the same time, it’s all digital, so these are all potentially global markets. I generally think they’ll move cautiously since regulations are different everywhere and there’s so much opportunity here.

The Partovi Brothers Keep It In the Family

Nationally, the Partovi twins don’t have the same name recognition as another pair of high-powered twins who will soon be appearing in StrictlyVC. But in the Bay Area, the 41-year-olds’ involvement in a startup – as both operators and investors – is a powerful signal that a company is probably on to something big.

Ali Partovi was on the founding team of the Internet ad company LinkExchange, acquired by Microsoft in 1998 for $265 million; Hadi Partovi was on the founding team of the speech recognition company TellMe Networks, also acquired by Microsoft, for $800 million in 2007. The brothers have also been early investors in Zappos, Facebook, Airbnb and Dropbox, among others, and they’ve cofounded two organizations together: iLike, a social music service that sold to MySpace for a reported $20 million in 2009, and Code.org, a two-year-old nonprofit that’s making computer science available in more schools. (This reporters’ sons have participated in its one-hour introduction to computer science, along with more than 75 million other people.)

StrictlyVC recently talked with the twins to learn more about their relationship, what’s most interesting to them right now from an investing standpoint, and what they make of the broader market. Our chat has been edited for length.

Hadi, you live in Seattle, while Ali lives in the Bay Area. How long have you lived in different cities, and how often do you see one another?

HP: I’ve been up in Seattle since 2002, but we see each other every few months.

You’ve been investing together for many years. How full-time is that pursuit? How involved are you in Code.org?

HP: Code.org now has 40 employees; it’s pretty all-consuming. We’re still investing as angels, though as a side job, which is when we’ve been best at investing. Because we don’t have enough time, we reject almost everything. But being picky makes us more selective. Of the 30 to 40 investments we’ve made, only two or three have been failures, and we’ve had 13 or 14 exits.

How many companies did you back in 2014?

AP: We made only four new investments. Over the past five years, we’ve averaged only four new investments per year. If anything, I’d be happy with even fewer. Our annualized IRR as investors has been 44 percent, not including Dropbox, Airbnb, Indiegogo, and others [that haven’t exited yet].

How does a startup win you over?

HP: We like companies that are making a social impact – not a charity but companies that have a vision that the world should be different and better. Snapchat, for example, is a really high-value business, but it’s unclear that its mission is making the world a better place. We also like tech that’s disrupting the physical world.

But the quality of the people involved is what’s most important. We’re probably the only investors out there who will run a tech team through a tech interview as if they wanted to get a job at Google or Facebook. After all, why would an investor give tons of money to someone who couldn’t possibly get a job at [one of those two companies?]

Have you missed out on deals because of that hurdle?

HP: Some, though if we miss them, it’s not a big deal. We can afford to be choosy. Also, I think entrepreneurs recognize that our investment means a lot and that they can tell other people, including other VCs, who know about our interview process.

What size checks do you write and what do you expect for your money?

HP: Check sizes range from $100,000 to $250,000 typically, and the size of the stake completely depends on whether something is earlier or late. I think the biggest check we’ve written was $2 million for [the still-private, cloud-based electronic medical records company] Practice Fusion, which we think is incredibly promising.

Would you make an investment without your brother’s blessing?

HP: Yes, though we’ve made better investments when it’s unanimous. Ali has a passion for food-related investments, but almost all the rest have been joint investments.

You were both investors in the food tech company Hampton Creek, correct? Did you participate in its $90 million Series C round, announced last month? Ali, you even joined, then quickly left, the company as its chief strategy officer. Are you and Hadi still investors in the company or have you sold your stake to other investors?

HP: We did not participate in Hampton Creek’s newest round.

AP: We are still holding our shares in Hampton Creek. Hadi and I’ve actually co-invested equally on most of my food and agriculture investments, including the biggest ones: Hampton Creek, BrightFarms, and Farmland. This is an area I’m very passionate about. I see enormous opportunity to make agriculture not only better for the world but also more efficient. [But] it’s important to temper passion with skepticism, and this is why Hadi and I make a good team. One of us always plays devil’s advocate. I rarely invest in anything if I can’t convince my identical twin brother to do so, too, and vice versa.

Have either of you ever failed miserably at something?

HP: I’d consider our last startup [iLike] a flop. Getting acquired isn’t bad, but getting acquired by MySpace, which was clearly on its way out of the history books, is. iLike had a meteoric rise but also a meteoric fall. We made a bet on the earlier version of Facebook’s platform, which enabled us to quickly grow to 16 million users. Then Facebook changed the rules of platform. iLike was one of many companies that built a user base on Facebook, then realized that user base wasn’t going to last.

AP: I agree. I [also] think there’s still a big opportunity in music discovery. While iTunes and Spotify have replaced the retail music store, nothing has emerged that truly replaces radio and MTV as a medium for discovering new music, learning about new releases and upcoming concerts, and creating a sense of community around shared music tastes.

Where else do you see opportunity, heading into 2015?

HP: We’re almost entirely consumer facing with a few exceptions. The one deep technology thing we’ve backed is Nervana [a San Diego-based company designing chips, hardware and software to speed a computer’s ability to learn over time]. There’s a whole lot that people don’t imagine that computers are capable of but that you’ll see in the next five years. It’s still in the R&D stage, but we think it’ll be a breakthrough architecture.

There are also a lot of untapped ideas and spaces if you think about changing the physical world and the many things that could be done better with computing and technology. For example, we think 3D printing will come online in a real way in the next few years, moving more from printing collectibles into furniture and artificial limbs that are the exact size needed.

People also talk a lot about self-driving cars, but we think you’ll see self-driving ships even sooner. A lot of time and money is spent putting big boxes on ships, including the people [required to staff them]. But unlike self-driving cars, which can seem scary – there are a lot of people on roads – the most dangerous thing about a ship is the people on board, who could drown. As long as you don’t puncture a ship, the worst thing that could happen is that it will stop.

Photo by Susan Tripp Pollard/Bay Area News Group

StrictlyVC: March 11, 2014

Happy Tuesday, everyone.

Hey, that time change wasn’t so bad after all, was it? (We kid! Whose wretched idea was Daylight Savings anyway?)

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Top News in the A.M.

It’s a contagion. Whisper, the 18-month-old anonymous sharing app, is raising “just shy” of $30 million at a post-money valuation of $200 million, reports Re/code. The deal comes just six months after the company raised $21 million from investors and brings its total funding to $54 million. (Notably, it also comes hot on the heels of a $10 million round for its younger competitor Secret, whose newest round was leaked to the media on Friday.)

Re/code reports that the new round is being led by Shasta Ventures, with Thrive Capital and China’s Tencent (which may reportedly chip another $15 million into the round) participating. Whisper’s earlier investors — they include Sequoia Capital, Lightspeed Venture Partners and Trinity Ventures — also joined the round.

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Metamorphic Ventures Closes on $70 Million to Back Post-Seed Deals

New York’s Metamorphic Ventures isn’t one of best-known brands outside the city. That’s by design, says cofounder David Hirsch, who was Google’s second employee in New York and stayed eight years before diving into venture capital in 2009. After raising $20 million from well-connected individual investors to get started, Metamorphic needed time to start proving itself, he suggests.

Fast forward to today, and things appear to be clicking along. The firm, which invests in digital media, commerce, payments, ad tech, software infrastructure and other Internet-enabled startups, has already enjoyed seven minor exits, and its portfolio includes promising companies like the popular crowd-funding platform Indiegogo and the retail analytics company RetailNext. More, Metamorphic has cultivated what Hirsch calls a “distributed human engine” made up of both powerful advisors (including Square’s head of product and engineering, Gokul Rajaram), individual investors (HSN Chairman and CEO Mindy Grossman), and deep-pocketed strategic investors (Advance Publications) that have collectively given Metamorphic another $50 million to “add to the cover” of that earlier, $20 million fund, says Hirsch.

The capital will be used to invest in many more startups, but Metamorphic also raised the funds to maintain more ownership of its breakout portfolio companies, which the firm hasn’t been able to do to date. Hirsch talked with StrictlyVC about it yesterday.

You’re looking to fund startups that have raised some money but not Series A money. Is that still an underserved segment in New York?

We think so. The market has really shifted to where the large private equity firms like Coatue Management and Tiger Global are [making big bets on later-stage companies] and big VCs like Kleiner Perkins are moving downstream to do more A and B. But there’s still a hole in the market right now in seed. It’s the opposite of the Series A crunch; we’re seeing amazing, angel-funded companies that are hitting their growth stages that don’t want to raise these mega A rounds just yet.

You say you made some mistakes early on. What was the biggest?

A lot of the companies grew bigger more quickly than we anticipated, so we ended up farming out our winners to Silicon Valley. We built a great portfolio, but [our fund] was too small to have meaningful ownership. So right now, the goal is 10 percent ownership – that’s what we strive for. We raised the money in order to have that optionality that we’ve been losing.

What size checks will you be writing now that you have more to invest?

They’ll be anywhere from $500,000 to $1 million for that first bite.

You have investments on both coasts. How would you characterize valuations in New York right now, compared with Silicon Valley?

It seems more specific to the team than [rooted in geography], though it sometimes feels like the capital on the West Coast is less price sensitive than in New York. That could be a function of a lot of things. I think New York is more monetization and revenue focused. [Investors here] like more data to back into a [high] price.

Is Metamorphic a typical New York firm in that sense?

We’re not value investors, but we’re disciplined as far as price is concerned, and we want to make sure we’re careful. We’ll pay up for the right teams. And we do believe we’re at the next generation of Internet businesses where maybe the price increase is justified. But sometimes it’s not. Sometimes you’re dealing with bigger investors who are [offering term sheets] as a call option, and that can price up opportunities for the wrong reasons.

Anything else you can share that you’ve learned thus far as a VC?

Google always had this [hiring] thing called the “airport test.” Someone could be an all star, super smart, capable of helping you solve pain points. But if you missed your flight and were trapped at the airport [together], would you be excited to hang out with this person?

Working relationships are long-term relationships; that’s true of [colleagues] as well as with investors and founders. There are always reasons to say no to deals. A lot of the business is just trusting your gut.

New Fundings

Drifty, a two-year-old, Madison, Wi.-based maker of tools to help mobile developers build their apps and sites, has raised $1 million in seed funding from Arthur Ventures, reports TechCrunch. The company was a participant in the TechStars Cloud 2013 incubator.

GroundMetrics, a four-year-old, San Diego-based startup that’s working with oil, gas, mining, geothermal companies and the U.S. Department of Energy to commercialize a new class of sensor-based survey and monitoring services, has raised $2.4 million in new funding, according to an SEC filing that shows a $3 million target. The company has raised at least $3.7 million in the past, shows Crunchbase, including fromTechCoast Angels and La Costa Investment Group.

OwnCloud, a three-year-old, Lexington, Ma.-based company that offers a commercial version of the open-source file sync and share community project of the same name, has raised $6.3 million in Series A funding led in part by earlier investor General Catalyst Partners, reports Boston Business Journal. The company has raised roughly $10 million to date, including from the Boston-based angel fund CommonAngels.

Quill, a four-year-old, London-based content marketing company, has raised $8.3 million in funding led by Smedvig Capital, with participation from Dan’l Hewitt, formerly of Demand Media and Vice Media. The company has raised roughly $10 million to date.

Woowa Bros, a three-year-old, Seoul, South Korea-based app developer, has raised $12 million from investors including CyberAgent Ventures,Altos Ventures and IMM Investment, according to reports. Among the company’s most popular apps is the Korean food delivery app Baedalui Minjok.

Sanghvi, a four-year-old, Pune, India-based company that operates numerous wellness brands, has raised $10 million in funding from Tano Capital, says VCCircle. The funding represents Sanghvi’s first outside capital, according to the report.

Shazam, a 12-year-old, London-based music app developer, has raised $20 million from a consortium of unnamed investors, reports VentureBeat. As a result of the new investment, Shazam’s valuation has increased to approximately $500 million, says the company. Shazam has now raised $92 million altogether, including from Kleiner Perkins Caufield & Byers,Institutional Venture Partners, DN Capital, Acacia Capital Partners, and Latin America’s largest wireless company, América Móvil, which invested $40 million in Shazam last June.

Svelte Medical Systems, a 6.5-year-old, New Providence, N.J.-based maker of expandable coronary stents, has raised $5 million in funding from the West Health Investment Fund. The company has raised roughly $52 million in equity and $22 million in debt over the years, according to Crunchbase. Some of its other backers include CNF Investments and New Science Ventures.

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New Funds

Tylt Labs, a year-old, L.A.-based early-stage fund focused on seed to A round opportunities, has raised $20 million toward its initial fund closing, the firm announced yesterday. Tylt was founded by L.A. entrepreneurs Rami Rostami and Gerard Casale and looks to invest $500,000 to $2 million per funding round per company, including consumer products, mobile platforms and services, home automation products, transaction software, clean technology, digital health and entertainment startups. (Note: StrictlyVC reported last Monday that the firm had raised $2 million, based on its SEC filing, which wasn’t the complete picture as we now know.)

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IPOs

Globoforce, a 17-year-old, Dublin, Ireland-based company that sells its cloud-based social recognition software solutions to enterprises, announced terms for its IPO yesterday, as noted by Renaissance Capital. The company, which is majority owned by Atlas Venture and Balderton Capital, plans to raise $75 million by offering 4.4 million shares at a price range of $16 to $18. At the midpoint of the proposed range, Globoforce would be valued at $472 million.

Matomy Media Group, a 6.5-year-old, Tel Aviv, Israel-based digital ad firm, is looking to raise $100 million in an IPO on the London Stock Exchange, reports Reuters. The company intends to issue new shares, and some of its existing shareholders, including Viola Private Equity, plan to sell some of their holdings.

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Exits

Phoenix Age, a nearly five-year-old, San Francisco-based game studio, has been acquired by Kabam. Phoenix Age doesn’t appear to have raised outside funding. Kabam, a 6.5-year-old, San Francisco-based games company, has raised at least $125 million to date, including from Canaan Partners, Redpoint Ventures, Intel Capital, Google Ventures, andPinnacle Ventures.

SecureForce, an 11-year-old, Sterling. Va.-based company specializing in providing cyber security engineering and compliance services to state and federal government agencies largely, has been acquired by BRTRC Federal Solutions, a similar company based in Vienna, Va. Cofounder Jonathan Perrelli left the company in 2010 to launch the Washington, D.C.-based early-stage investment firm Fortify Ventures.

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People

Billionaire Internet investor Mark Cuban on bitcoin: “I think as an encryption technology, it’s great. I think as a transport mechanism that it’s unique and has a great opportunity in the future. I think it’s got no shot as a long-term digital currency.”

Michael Redd, a former NBA All-Star who long played for the Milwaukee Bucks and was a star basketball player at Ohio State University, has been named a partner at the Columbus, Oh.-based venture firm NCT Ventures, reports Columbus Business First. “This is a complete stretch for me,” Redd tells the outlet. “The whole focus of the past 20 years has been basketball. To pick up another passion can be challenging, but I accept the challenge.”

Former YouTube executive Baljeet Singh is a newly appointed product director at Twitter, where he has the major-league task of adding more video to the platform, making that video easier to find, then selling ads against it. The Verge, which reports on Singh’s new job, notes that while at YouTube, he developed those skippable pre-roll advertisements we’re all accustomed to seeing, among other projects. (He left Google last month after five years.)

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Job Listings

Pandora, the popular music-streaming service, is looking for a VP of corporate development and a head of corporate strategy. The newly posted jobs are in Oakland, Ca.

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Data

A new academic study finds that for venture funds, “performance persistence post-2000 remains as statistically and economically persistent as pre-2000. Partnerships whose previous VC funds are below the median for their vintage year subsequently tend to be below median and have returns below those of the public markets (S&P 500). Partnerships in the top two VC quartiles tend to stay above the median and their returns exceed those of the public markets.”

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Essential Reads

Investor adviser Institutional Shareholder Services is on the cusp of selling to Insight Venture Partners, sources tell the WSJ. People close to the sales process have said the company could fetch around $300 million.

The New Yorker’s James Suroweicki takes down the impending IPO of “Candy Crush” maker King Entertainment before public investors do the job.

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Detours

President Obama hilariously sits “between two ferns” with Zach Galifinakis.

This startup tased its intern to illustrate how its flying drone would handle unwanted houseguests. (And you thought your first job was lousy.)

Perfect strangers kissing.

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Retail Therapy

The already excellent Mophie iPhone battery case has just been improved on, with Mophie’s newest product not only promising users far more battery power but loads of storage, to boot.

This is like a poor man’s “Minority Report.” (We like it.)

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