IVP

Todd Chaffee has spent the last fourteen years as a managing director at Institutional Venture Partners, a Sand Hill firm that has evolved into a powerful late-stage investor over that period. (It celebrated its 101th IPO last month when the small business lender OnDeck went public.)

Given the market zigs and zags that he has witnessed, we asked Chaffee — famous for his investments in Twitter and HomeAway – to share what he’s seeing in the late-stage market right now. We chatted yesterday in a conversation that has been edited for length.

Just how bad are late-stage valuations right now?

They’re high. They’re extraordinarily high. At the same time, the companies we’re seeing are more interesting, with more attractive business models and stronger and faster revenue growth than we’ve seen before. So it’s a little like, prices are high, but these are amazing companies. It’s a bit of a high-wire act.

Have you been passing on deals you like?

We’re very selective. We see several thousand deals a year, evaluate several hundred, and last year we made 14 investments. It’s a funny time because prices are so high, but these companies are so cool. When you have great management, a big market, and numbers [moving] up and to the right, you have to pay a high price.

IVP hasn’t backed one of the most highly valued private companies in the U.S.: Uber. Why?

Uber is in our “anti portfolio.” It’s a phenomenal company, with probably more potential than any other private company that’s out there right now. It could be Googlesque.

Why not jump into one of its many, ongoing rounds then? Is it too richly priced at this point?

We don’t have current numbers, but I know it’s beating its numbers all the time. . . That said, its valuation is way, way ahead of the fundamentals in every round. We usually don’t have to stretch too far; we don’t have to pay crazy prices to access top companies.

Would you make another bet on this trend of people driving less?

I think Uber wins this and will be the dominant player with the largest market share by a long shot. You can be the number two or three player, but it’s tough. Generally, we’ve found that if you back the market leader, it will drive the greater returns.

What about the so-called connected home? It’s all anyone can talk about this week because of CES.

We invested in Dropcam [acquired last summer by Nest Labs] and we were looking at Nest before Google acquired it [a year ago]. Those were the best two companies in that space as far as we could tell.

I do think there’s opportunity there, but I also think [the connected home is] part of the hype cycle and that we haven’t reached the “trough of disillusionment” yet. We’re still in the “this is going to be amazing” phase.

You came to IVP long ago from American Express and Visa. What do you make of today’s payment technologies?

Payments are a funny thing. They migrate very slowly. We’ve been using paper and coins for thousands of years. Also, the thing about payments systems that people forget is that it isn’t a technology problem; it’s a system of guarantees. That’s what makes a payment system work – not whether the wireless NFC [reader] or the magnetic strip on the credit card will work.

How do you feel about Bitcoin?

I don’t know what to make of Bitcoin. I’ve looked at it. I saw the wave of payment systems back in the [dot com] era: CyberCash and DigiCash and all those players and passed on them, which was the right thing to do. Bitcoin seems to have more momentum. I’m just not sure. The payment system works pretty well right now.

What interests you more?

I’m very interested in security companies right now. There are huge issues underway. There are fires in the building – right now – in enterprise.

We think the media world is fascinating, with big incumbent players just kind of losing it while companies like Vice and Buzzfeed and Business Insider – one of our portfolio companies – are showing up and saying, “We know how to work mobile and social.”

We also think — to [riff] on Marc Andreessen’s [2011 observation] that software is eating the world — that mobile is eating software. Mobile is eating the web.

IVP has backed Snapchat and Dropbox, which are riding that trend. What about startups that are turning smartphones into remote controls for the physical world. Are you interested in delivery service startups, for example?

Not many have broken out and gotten to our stage yet in terms of scale. Also, when you have a physical aspect [to your business], you have to watch the margins. They get tough. If you’re going to deliver things, the operational intensity is high. Just because you can do something doesn’t mean you should do it.

Did you look at the grocery delivery company Instacart, which just raised $220 million at a $2 billion valuation?

We did. I know Instacart has a great team and great model and attracted some marquee investors at a staggering valuation. The jury is still out.

Instacart’s newest round was led by Kleiner Perkins, but many deals now involve public market investors who’ve moved into private market investing. How are you getting on with them?

It’s good when they pay a higher price than we do. It’s troubling when they become undisciplined. Most are pretty good. We’re not seeing too many drunken sailors yet. I’ve been doing this for 20 years, though, and you always get one or two [firms] that you’re like, What are those guys doing?

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When Twitter goes public shortly, you can bet it will be a proud moment for Institutional Venture Partners. But it will be icing on the cake for its investors. Already, 95 of IVP’s 300 portfolio companies have gone public. Already, IVP’s 32-year internal rate of return, dating back to its 1980 founding, is a stunning 43.2 percent.

IVP has pulled off this hat trick by operating in as proudly an old-fashioned way as possible.

Unlike many of its peers on Sand Hill Road, for example, IVP’s walls aren’t filled with contemporary art but rather dotted by the same, framed antique prints and maps of Santa Clara County that have hung there for years.

By design, IVP doesn’t have celebrity investors. Its oldest partner is Norm Fogelsong, a former programmer at Hewlett Packard who joined IVP in 1989 and has remained virtually unknown outside of venture capital circles ever since.

IVP also eschews the popular wisdom that operators make the best venture capitalists. In a recent sit-down, Fogelsong calls venture an “apprenticeship business that you learn over time.” In fact, unlike many firms that cycle their associates out the door after a few years, IVP sends them off to business school, then brings them back and promotes them.

“Assembling a multi-generational team is one of the secrets to our success,” says Todd Chaffee, the IVP general partner who has largely assembled IVP’s current team of six general partners — along with its bench of associates, principals and vice presidents. “It gives us different eyes on every deal and combines the energy and hustle from the younger team with the experience and insights of the older people.”

Yet there are other ways that IVP has distinguished itself from the pack.

Though its investments used to run the gamut, the firm decided in 2000 to focus on one area almost exclusively: later-stage companies with between $10 million and $100 million in revenue. Likely, the move has paid off better than the firm could have imagined. During the go-go dot com era, emerging companies with between $10 million and $30 million in revenue could go public with the help of a boutique bank. But today’s companies need revenue in the $100 million range to go public, meaning they often need late-stage capital from firms like IVP.

More, unlike some industry peers that have collected billions of dollars from their limited partners in recent years, IVP has grown steadily, its fund sizes slowly expanding as its commitments to later-stage companies have grown. Over its last five funds, IVP has raised $225 million, $300 million, $600 million, $750 million, and $1 billion, a sum it closed on last year.

The money still adds up. Three billion dollars of the $4 billion that IVP has raised in its entire history has poured in over the last 13 years. But Fogelsong shrugs off any suggestion that it could jeopardize IVP’s continued ability to deliver big returns. “If you’re going to be a late-stage investor, investing $30 million at a time, you can’t do that with a $100 million fund.”

Which raises one final point. IVP makes just 10 to 12 investments annually, each chosen from the pool of roughly 2,000 companies it sees each year. Pacing itself means turning down some attractive deals. But sounding every bit the Stanford engineering student he once was, Fogelsong says the “idea is to make three to five times our money in three to five years, for a 41 percent internal rate of return. We don’t care how much of a company we own. What we want is to get our capital deployed properly in the best companies at a proper valuation.”

Fogelsong shoots me a confident smile. “We have a very tight, well-defined investment strategy,” he says.

It’s not not flashy. It’s not novel. Very plainly, though, it works.

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