Shasta Ventures

Another Niche E-Commerce Company, Jack Erwin, Takes Off

VCs must be hearing a lot of pitches from companies that want to be the next Warby Parker, the chic discount online eyeglass vendor, whether it be high-tech wine gadgets, fitted shirts, or dress shoes for men.

If the market is getting saturated with these new brands, you wouldn’t know it. In fact, this morning, another new shoe company called Jack Erwin is announcing that it has raised $2 million in Series A funding led by Crosslink Capital, with participation by Shasta Ventures and Menlo Ventures. Yesterday, to learn more, I reached Lane Gerson, one of the founders of the six-person company, at the startup’s Brooklyn-based offices. Our chat has been edited for length.

You’ve worked as a CFO and a controller. Did you know anything about retail? And why shoes?

My friend and cofounder [Ariel Nelson] was shopping for shoes for a wedding and just wanted dress shoes, and they were all either too [fussy] or too expensive. We wondered if we could find someone to help us make a pair of shoes for $100 that we could then sell for $200, and we spent three months talking with everyone we knew, and each was a dead end. As it happens, Ariel went to a two-seat barber and wound up sitting next to a [product manager of footwear] at Ralph Lauren, who was dealing with buyers and suppliers. We all went for drinks a few weeks later. That was August 2012; he just came on full-time in January.

You have five core shoes in a few different colors. Where are they being made?

In Portugal, at a third-generation factory. We’d talked with factories in Brazil and Portugal and received a bunch of samples and this one had the best quality leather shoes. So we worked with a designer, they sent us samples, we corrected them, and we placed our first [purchase order] in May 2013.

You make it sound so easy. Where are the shoes shipped?

They’re warehoused in a third-party logistics center in Brooklyn, less than three miles from our office.

What’s your return policy?

Free shipping, free returns. We want people to try them on and then hopefully they’ll enjoy and keep them.

What percentage of your customers return the shoes?

About 25 percent, but the data is inconclusive right now. We launched the company publicly in October and we’ve had tremendous demand — so much so that we’ve sold through or initial order and are left with broken sizes. So people are buying sizes that aren’t the right size, and they want exchanges that we don’t have. We raised the [venture] money almost purely to buy inventory.

Is that supply-demand balance hard to manage? What’s been the biggest surprise so far?

It’s all been really positive actually. We’ve learned there’s an appetite for people to buy new product and I think people like a new story and are wiling to give us a try. And if you can give them a product that meets their expectations and you’re responsive to them, you meet great people. We’re discovering that just being nice goes a long way.

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For Nest Investor Shasta Ventures, Persistence Pays

Google’s plans to acquire the smart home appliance maker Nest Labs for $3.2 billion in cash should translate into a tidy return for the half dozen firms that invested $80 million in the three-year-old company. Kleiner Perkins may have the most reason to kick up its heels, having led Nest’s Series A round in early 2011. (The deal, rumored to give Kleiner a 20x gross return, might well convince its limited partners that Kleiner has recovered its mojo.)

But the deal is also a personal victory for venture capitalist Rob Coneybeer of 10-year-old Shasta Ventures, who was introduced to Nest founder Tony Fadell eight years ago by fellow VC Stewart Alsop. (“He thought we’d like each other,” explains Coneybeer, who is a mechanical engineer by training and shares Fadell’s love of gadgets.)

Once acquainted with Fadell, Coneybeer spent as much time with him as he could in the hope that one day they could work together. Last night, I talked with a clearly elated Coneybeer about his relationship with Fadell and his subsequent investment in Nest; what follows is a lightly edited transcript.

Where does your story with Fadell start?

I’ve been interested in mobile and hardware and investing in the Internet of things for a while, and when Tony left Apple, I kept in touch with him as he was investigating different ideas, including devices that use batteries to get recharged and what happens to those devices if you connect them to the Internet. So he’d been thinking about things, and we’d get together every two to four weeks to talk.

When did it turn into more than that?

Tony had gotten to know myself and some of my partners, and he’d developed relationships with a couple of different firms … When Tony became difficult to reach, I realized he might be starting something, and I basically pursued him and said, “I’d love to find out what you’re up to,” and I offered to sign an NDA. And he said, “You’d do that?” And I said, “Yeah, I never sign NDAs, but to learn what you’re up to, I would, absolutely.” A week or two later, he walked me through what he was up to, and I met the core team he’d pulled together.

He went with us and with Kleiner [for Nest’s A round]. He’d known [Kleiner partner] Randy [Komisar] for a long time, and Randy has great experience in bringing consumer electronics to market [including as a founding director at Tivo].

What was Shasta’s value-add to the company?

It was a good personal fit. And having built [Shasta] around consumer and expertise around hardware companies, we were able to make great introductions, including to Best Buy and Lowe’s and other channel partners. We also helped with recruiting, in closing key candidates. Beyond that, it’s hard to provide a laundry list; Nest has such an accomplished team.

Kleiner led the Series A round, but you say Shasta was a “significant participant.” Can you talk about what kind of return you’ll see from Nest’s sale? TechCrunch sources say it will return “almost all” of your second, $250 million fund, closed in 2008.

I can only tell you that [the return will be] very, very, significant. I’m sorry I can’t be more specific, but you can write “very” three times.

Is Nest your biggest exit personally? I recall that before Shasta, as a partner at New Enterprise Associates, you led an investment in the fiber optic switching company Xros, acquired by Nortel.

That was $3.25 billion, so this is my second three-billion-dollar outcome. It does feel really good to build something from scratch [Shasta] and work really hard for 10 years to build a brand and to [be a part of] a product and outcome that people are really excited about. It feels like things are finally coming together.

Are you even a teeny bit disappointed? I know you thought Nest could become a formidable standalone hardware business.

I’ll just say that Google is acquiring the best hardware team on the planet. In terms of designing high-quality, durable, consumer hardware, you can’t name a better team.

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To Save Other Startups, Exitround Has to First Prove Itself

Many thousands of companies have been funded in recent years, and most of them will fail. Exitround, a San Francisco-based startup, hopes it can find buyers to snap them up.

Exitround was founded about a year ago by Jacob Mullins, who was working at the time as a senior associate at Shasta Ventures. (He left the firm this summer.) “We’d see really smart entrepreneurs with great ideas and great products who potentially wouldn’t be able to get that next round of funding but that would be interesting to a Facebook or Twitter; I started thinking there was more of a marketplace [opportunity] here.”

One can see why. Just yesterday, the outlet The Verge lavished several thousand words on the failure of Everpix, a startup that helped users easily store and organize their photos. Everpix’s founders include a French entrepreneur who sold his first company to Apple a decade ago. Beyond the founders’ pedigree, the team had also raised seed funding from some top-notch VCs, including Index Ventures. Exitround would seem a great alternative to shutting down completely, as Everpix was abruptly forced to do.

Here’s how it works: Exitround makes introductions between startup teams and corporate development types. It also provides plenty of anonymity to startups seeking buyers. Exitround supplies buyers with a rough sketch of a startup’s offering. If a buyer expresses interest, Exitround checks with the founding team before providing more information or setting up a meeting. For its matchmaking, Exitround charges a recruiting fee of between $10,000 and $20,000 per hire.

So far, Exitround has convinced more than 500 buyers to sign on to the platform, Mullins tells me. Among them, he says, are “growing startups with super-aggressive growth goals,” big tech names that are known to be serial acquirers, and “legacy companies, including in manufacturing, insurance, healthcare and hospitality. These are companies that, while their core business may not be tech, realize that they need to deliver a better customer experience.” He also says Exitround has attracted “hundreds” of startups to its platform.

Still, not everyone is convinced that M&A can be automated. One corporate development executive privately tells me his company’s experience “acquiring and integrating companies has been very difficult,” adding that using a middleman like Exitround would “just be adding on another layer of complication.”

Scott Rafer, a serial entrepreneur who has been in acqui-hire situations numerous times, also sees problems with Exitround’s model. First, he notes that the “likelier buyers know everyone in their sector … if there’s any IP value at all.” Also, he questions Exitround’s ability to keep its deals completely anonymous. “If a company is described [to a potential acquirer] in any way that’s useful, three minutes on Google, and any decent corp dev guy can figure out who it is.”

Such issues may explain why Exitround is a bit cagey about its progress. Although the company announced its first “exit” in July, Mullins tells me he can’t release any transaction details. Similarly, he says Exitround has “sold some [startups] subsequently,” but he doesn’t disclose how many or any other details about these deals. Mullins also isn’t revealing how much capital has Exitround garnered to test out its business. (He says the company has raised seed funding but that the round remains open, with Exitround hoping to bring aboard “a few other investors strategic to our business.”)

Either way, a veteran who has been shutting down companies for decades – Martin Pichinson of Sherwood Partners – thinks there’s plenty of room for a company like Exitround in today’s market.

“I think this is a fantastic idea,” says Pichinson. “It’s hard for corp dev people and others to always and easily have quick and easy access to new technologies, ideas and know-how. We are in an exciting new world, and anything that can expedite adoption is a total win.”

Shasta Ventures

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